SEED Assistance Summary 1994
SEED Act
1994 | 1995 | 1996 | 1997 | 1998 | 1999
2000 | 2001 | 2002 | 2003 | 2004
Economic Developments:
The Czech Republic has made remarkable progress in reforming and stabilizing its economy since 1991. Tight fiscal and monetary policies, the liberalization of trade and prices and excellent progress on the privatization of state-owned enterprises have gradually overcome the initial shocks of the transformation from a centrally-planned economy, the collapse of the CMEA trading system and Czechoslovakia's own split into two nations.
As a result, after sharp contractions in 1990-92, the decline in real domestic production leveled off in 1993 and, in 1994, the economy is expected to resume its growth, at a rate of about 3 percent. Inflation, which rose moderately in 1993 to an average annual rate of 18 percent in the context of the imposition of a new value-added tax, settled in 1994 to rate between 10 and 12 percent. Unemployment, finally, remained low throughout both years, at a remarkable 3.5 percent.
Performance within the Czech republic's external account was equally good. In 1993, a solid export performance, increasing tourism receipts and strong private capital inflows (largely in the form of loans to Czech enterprises) helped boost gross official reserves by more than $3 billion to five times their year earlier level. By year-end 1994, gross official reserves are expected to reach $6.1 billion, setting the stage for the anticipated elimination in 1995 of all restrictions on current account transactions.
The Czech republic's integration into the world economy has also moved forward rapidly. Exports to OECD nations rose to more than half the Czech Republic's total exports in 1993; and foreign private capital flows have been substantial. The Czech Republic has already concluded an Association Agreement with the EU, free trade agreements with the members of the European Free Trade Area (EFTA) and its partners in the Central European Free Trade Area (CEFTA), and applied for membership in the OECD. It is also a member of GATT, the IMF, the World Bank, the EBRD and other international institutions.
Looking ahead, prospects for the Czech Republic are very good. A strong industrial tradition, progress in privatization and prudent fiscal and monetary policies augur well for strong, non-inflationary growth. Real GDP growth in 1995 is expected to be between 3 and 5 percent; inflation approximately 10 percent and unemployment somewhat higher at approximately 5 percent.
However, there are potential problems. Fiscal adjustment is still incomplete. Overall government expenditures (at 47 percent of GDP) are excessive; corporate and individual income tax rates are among the highest in Europe; and the forecast 1994 fiscal surplus reflects one-time privatization proceeds that cloak an underlying equivalent to 2 percent of GDP. In addition, serious moves on enterprise restructuring have yet to begin. The low rate of unemployment, low number of bankruptcies, declining productivity and poor (and, in cases, deteriorating) financial situation of many Czech enterprises, testify to the limited effect on enterprise performance of the wide-spread privet rations that have taken place in recent years. Finally, there may be problems buried within the Czech banking system and elsewhere in Czech financial markets. The reluctance of Czech banks to exercise their rights under bankruptcy laws hint at problems, as does the pricing of Czech investment funds, which traded at discount to the value of their underlying stocks throughout most of 1994.
Political Developments
In the five years since the Velvet Revolution that ended communist rule, the Czech Republic has undergone a radical political and economic transformation and returned to the ranks of free-market democracies. Given the success of this transition, the Republic will be graduated from the SEED assistance program beginning in 1997.
The Czech Republic is a fully functioning parliamentary democracy whose citizens enjoy the rights of free speech and free assembly. It has an independent legislature and a vigorous, free press.
Prime Minister Vaclav Klaus's ruling four-party, center-right coalition was elected in June 1992. There are also four left-of-center opposition parties and one radical right-wing party. The Czech Constitution mandates Parliamentary elections at least every four years; early elections appear very unlikely at this point. independent candidates won a majority of local council seats in nationwide local elections held in November 1994; among the national parties, Prime Minister Klaus's Civic Democratic Party (ODS) garnered the most votes, followed by the Communists (KSCM) and Christian Democrats (KDU-CSL).
The Constitution also calls for a Senate, which has not yet been constituted. Two draft constitutional amendments to abolish the Senate have failed in Parliament, but no clear consensus has developed on when -- or whether -- to hold elections for the upper chamber.
President Vaclav Ravel, elected by the Parliament in 1993 to a five-year term, has limited constitutional authority but can veto legislation and return it to Parliament, which has the power to override it. Opposition groups, including political parties, function openly and without hindrance. Individuals speak out on political and other issues and freely criticize the Government and public figures. Print and electronic media also publish without censorship or fear of government persecution, though the Constitutional Court in December 1993 upheld a 36provision in the Criminal Code forbidding defamation of the state or presidency. The law was not applied at any time in 1994.
The government is continuing a thoroughgoing reform of the judiciary and law enforcement bodies and has reasserted civilian. control over military and intelligence organizations. The judiciary is impartial and independent. The Czech Republic also encourages the activities of domestic and international human rights organizations. President Vaclav Havel was formerly a dissident and human rights monitor. This is an encouragement to similar groups, who are now free to work without government restriction.
Nonetheless, there are some areas of concern. The main human rights problem continues to be discrimination against the significant Roma minority, estimated at around 200,000, which suffers disproportionally from poverty, crime, and disease. Moreover, the citizenship law adopted after the separation from Slovakia has denied Czech citizenship to large numbers of Roma.
The Constitutional Court in December 1993 upheld a law defining the former Communist regime as criminal and lifting the statute of limitations for crimes committed by the Communist Party of Czechoslovakia. Though rarely invoked, the law has drawn criticism for adopting the principle of collective guilt. The 1991 Lustration Law, which bars former Communist officials, secret police and collaborators from holding a wide range of elected and appointed positions for 5 years, also remains largely unenforced. Nevertheless, it has opened the Czech Republic to criticism for appearing to embrace employment discrimination and the concept of collective guilt. In perhaps the most celebrated lustration case, the Government in September 1994 dropped charges against former federal parliamentarian Jan Kavan.
SEED ASSISTANCE SUMMARY
Program Overview
USAID began assistance programs to Czechoslovakia in August 1990. Anticipating a possible split between the Czech Republic and Slovakia, implementation of U.S. assistance to the country began at the level of the two republics. The strategy permitted minimal disruption when the Czech-Slovak separation occurred. In January 1993, the USAID office in Bratislava assumed separate program management and budget operations for Slovakia.
The Czech Republic has enjoyed a successful and relatively stable macroeconomic transition with regard to monetary and trade policy, and to a lesser extent, structural reform. As a stable macroeconomic environment matures, microeconomic policies, and more importantly, the public and private institutions that are the fabric of society in democratic market economies, require renewed attention and support.
Today, U.S. assistance efforts emphasize:
- building the private sector wad free nws*ets by developing workable systems to privatize state enterprises, improving banking and financial services and training business managers;
- improving the quality of fife by increased energy efficiency and helping industry make environmentally sound improvements;
- strengthening democratic institutions by helping reform the legal, regulatory, institutional, and administrative structures.
As of September 30, 1994, approximately $130 million of SEED assistance had been obligated for the Czech Republic. Current fiscal year funding of $15.4 million reflects the program priorities. The Czech Republic is in a new stage which requires greater attention to building democratic structures. The SEED program is shifting its focus to these priorities, even as graduation from the program is being planned.
Program Highlights
Since 1990, SEED has provided a wide variety of technical expertise, legal advice, training, financial support and voluntary services across virtually all areas of reform in the Czech Republic. Most prominent however, remains the work on privatization and economic restructuring by which SEED has played a central role in a record transfer of assets and productive capacity from the public to private sectors: since 1989, over 80% of the economy has been shifted from public to private hands.
In 1994, the USAID advisory team continued to play the central role in advising the Ministry of Privatization in its final phase of privatizing the Czech economy. Hundreds of privatization plans have beat reviewed by this team of bankers, accountants, and lawyers, and over 120 transactions have been completed by the Czech government on the advice and negotiation of this team. The monetary value of these transactions, significantly increased through the work of the advisory team, is approximately $2 billion. Of greater importance, this work has helped create a fair and transparent process in which US investors have been increasingly illing to compete and win.US investments continue to account for some 40 percent of this total dollar amount. The team has now been asked to concentrate their work on industrial restructuring, which remains at issue despite the shining success of Czech coupon privatization.
SEED funding has had significant impact on the quality of life. In the heavily polluted city of Ostrava, the largest steel factories have applied economical investment recommendations of Department of Energy consultants that reduce factory pollution up38to 50 percent. The World Environmental Center helped the largest refinery and petrochemical plant in the Czech Republic minimize the risk of catastrophic explosion and reduce cancer-causing emissions by 85 percent with a $20,000 investment that yields over $100,000 a year in savings. The Nuclear Regulatory Commission's assistance has resulted in new Czech regulations that mirror U.S. nuclear safety standards. The Commission work also helped provide better trained safety inspectors.
Technical assistance is responsible for helping to strengthen democratic institutions on the national and local level of government. As part of decentralization, the city of Liberec received responsibility for the large stock of state housing. Housing sector assistance provided by the ICMA/Urban Institute joint effort helped the city to inventory its housing stock and design and implement housing management contracts. The result was greater competition among management enterprises that improved services for citizens. The project now is assisting in the privatization of the public housing in Liberec.
Program Phase Out and New Priorities
After another year of steady progress in the Czech Republic towards a fully democratic and market-based society, the Country Assistance Strategy was amended in May 1994, accelerating the phaseout plan, ending new obligations, with few exceptions, after FY 1996.
Completing the major portions of the privatization program and establishing the basic infrastructure for sustainability of US-supported reforms are essential elements in the time remaining years for the assistance program. Five priorities for the phase-out period, affirmed by Czech authorities, will increase the likelihood of the sustainability of the transition and the institutions it engenders. The five priorities are: 1) continued economic transformation, including privatization and restructuring; 2) strengthened human resources, focusing on financial and managerial skills; 3) improved quality of life through cross-sectoral work in energy, environment and health; 4) strengthened local governments and municipalities through support for public administration reform, municipal financing and management; and, 5) support for development of civic society. These priorities have the overriding goal of assuring that viable, sustainable institutions are created to maintain the momentum of reform. Three major new initiatives exemplify this new focus: the first, supporting local government empowerment and public administration reform; the second, providing technical assistance and financial support for municipal finance, and the third, helping to build strong and sustainable civic society by training, technical assistance and grants for non-governmental organizations and educational reform.
Program Challenges
As the program begins its phase-out, challenges remain that may inhibit the success of some activities. Foremost, although the Czech Republic has enjoyed impressive progress in the face of difficult reform, a legal and administrative framework suitable for a functioning democracy is not necessarily in place and may not be recognized as a high priority by current Czech authorities. Future problems in managing the pressures within a competitive market economy could contribute to a political backlash that might threaten both future reform and the gains made to date. SEED will be working to improve local governments' abilities to respond to their constituencies, as well as finance long neglected public investment, to help counter this risk.
Back to Top ^ |
