Political Economy of Reforms: The Czech Experience Pavel Mertlík Chief Economist

1. Political Economy of Reforms:The Czech Experience Pavel Mertlík Chief Economist Growth Strategies – Czech Ambition and OECD Experience Paris, OECD 11 January 2005

2. Political Economy of Reforms Key Success Factors of Market Economy • Political stability, social cohesion, efficient and performance-oriented governance, rule of law • Macroeconomic stability and dynamics • Legal framework, enforcement • Infrastructure (physical infrastructure, economic environment including supply chains, knowledge base – R&D, universities) • Educational standard of labor force • Labor market flexibility • Free market entry + exit • Cultural openness • Cost base

3. Political Economy of Reforms Strong points of Czech Republic • JPolitical stability • J Social cohesion • J Dynamic economy with excellent macrostability • J Liberal labor market, flexible business environment • J Still low but „catching up“ costs • J Low taxation • J Locational factors • J Good economic contacts in CIS and the Balkans • J Good quality of technical education, although with shortcomings in new technological developments • JWork ethics

4. Political Economy of Reforms Weak points of Czech Republic • LWeak (mostly minority) cabinets, • L Structural problems: high energy intensity, population ageing => unsustainability of welfare state in the long run • L Disintegrated R&D base • L Incompetitive university system • L Inefficient government, red tapes to entrepreneurial activities • LWelfare structure that disincentivizes labor – insufficient pressure for economic activity • L Slow and unpredictable justice • L Substandard transparency, weak anti-corruption • LGrowing anti-competition attitudes (but far not in that extent like eg in France)

5. Political Economy of Reforms Special Focus: Education and Labor Market • Education • Low total output of university graduates • Inflexible reactions of universities to labor market demands • Cooperation with industry and businesses subdued • Low quality of new regional universities (quantitative growth of universities dominant ) • Labor market flexibility: comparatively high but deteriorating since mid-1990ies • Government and legislation until recently didn‘t support part-time and term labor contracts and freelance recruitment

6. Political Economy of Reforms History of Reforms in the Czech Republic 1990 – 1992 First Reform Wave 1993 – 1996 „Czech Road“ 1997 – 2003 Second Reform Wave • Economic transformation finished before EU enlargement • Economic reform agenda since 2003: „European reform business as usual“ – fiscal consolidation, pension reform, health care financing, flexibility of labor market, further deregulations and competition upgrades, reforms of financing of university education… Strategy papers: • 1999: Economic Strategy of EU Entry • 2005: Economic Growth Strategy

7. Political Economy of Reforms Key Issue: Finding Consensus • Since 1996 minority cabinets • Finding political consensus – key issue in reform effort and policy-making • Broad public discourse • Political negotiations • The content of reforms compromise, but solid and firm • High speed of change in public acceptance of new social phenomena in Central European countries allows reformers to keep on fast track • „Shock Therapy vs Gradualism“ discussion of the early 1990ies: gradualist approach reigns in the Czech Republic (not necessarily in rhetoric)

8. Political Economy of Reforms Economic Growth Strategy: The Art of Feasibility • The Economic Growth Strategy of 2005 – a case of the „gradualist“ tradition: • Some „radical“, ie socially controversial, proposals not approved by the government: university tuition fees, social insurance cuts… • …. But discussion about them fostered via the process of work of the task force of the „Strategy“ document, and prepared ground for future discussion, finding consensus, and implementation in due time

9. Political Economy of Reforms Raiffeisen Research New information on Czech and global economic development daily on http://www.rb.cz , section research Publications:Okénko trhu (daily, in Czech), Equity Daily Report (daily), CEE Weekly Bond Market Outlook (Friday), CEE Equity Weekly (Friday), FX Weekly (Monday), Focus FX Weekly (Tuesday), Market Monitor – finanční trhy (monthly, in Czech), Market Monitor – měsíční přehled (monthly, in Czech), Strategy East (quarterly), Strategy Czech Republic (annually) Economic Research Department - contacts: Pavel Mertlik (macro) tel. (+420) 221 141 800, pavel.mertlik@rb.cz Helena Horska (macro, FX) tel. (+420) 221 141 729, helena.horska@rb.cz Michal Brozka (macro, fixed income) tel. (+420) 221 141 498, michal.brozka@rb.cz Jindrich Svatek (stocks) tel. (+420) 221 141 841, jindrich.svatek@rb.cz