Czechs Join Economic Club Of the Industrial Nations

The Republic will be the OECD's first Eastern European member

THE Czechs like to be first.

The Czech Republic is scheduled to sign a membership agreement to the Organization for Economic Cooperation and Development tomorrow in Paris. It will be the first time the OECD has accepted one of the countries of Eastern Europe as a member.

The Czechs see membership in this Paris-based organization, which is essentially the leading industrial democracies' club-cum-think tank, as another credential, another sign of acceptance by the West as they move toward the ultimate goal of membership in the European Union.

For all their much-vaunted economic success of the last few years, the Czechs are finding just how difficult it is for their country to close the gap in living standards with their Western neighbors. As Jeffrey Sachs, the Harvard University free-market economist and adviser to Eastern European governments, says, "It's clear that neither the Czech Republic nor any of the other countries of the region have really arrived fully at the steps needed for the second stage of transformation [out of Communism]: rapid catch-up with Western Europe, bridging the divide that came so artificially and so brutally over 40 years."

Now comes the hard part, in other words.

As Professor Sachs points out, it would take 10 years of 7 percent annual growth for the Czechs to double their income. But doubling their income would close only about half the gap, since Western European incomes run about four or five times the size of the Czechs'.

GDP like Malaysia's

The gross domestic product (GDP) per capita in the Czech Republic, $3,487 last year, puts it in about the same league as Malaysia, for instance. It's worth remembering, too, that Czech living standards are not yet back to where they were before the transformation began in 1989.

Though the Czech economy is humming along nicely, it's not growing at 7 percent. "This year we expect about 4, 4.2 percent growth of GDP, and next year ... 4.8 percent," says Vladimir Dlouhy, the Czech minister of trade and industry. The industrial sector, he adds, has already grown 7.8 percent in the first eight months of this year.

Sachs sees 7 percent growth as a reachable target. "The good news is that many countries in the world, countries that are at the same income levels as the Czech Republic now finds itself, are indeed achieving growth rates consistently of 7 percent and even higher per year."

The models he points to are the "tigers" of East Asia. He describes these economies as characterized by growth rates of as much as 8 percent - and by strong export sectors, low taxes, high savings rates, innovation-minded management, flexible labor markets, deregulation, and serious investment in human capital.

Neighboring Poland has been growing at about 6.5 percent annually, But unemployment still stands at about 15 percent. In the Czech Republic, unemployment is projected to be 3.2 percent for this year - one of the lowest rates anywhere in Europe, east or west. This low unemployment, moreover, includes a lot of people losing jobs and finding new ones, rather than the same people remaining unemployed for a long time. Economists cheer this sign of labor-market flexibility.

Bloated staffing

Czech Republic businesses, however, have a serious problem with overstaffing. Experts estimate that enterprises have about 15 percent more workers than needed. A visitor notices the squads of young people leafletting in the subways, or the platoons of waiters standing around in a hotel restaurant. More significant is the overstaffing in the industrial sector.

The Czech Republic has gone through a major privatization of formerly state-owned enterprises. But here as elsewhere in Eastern Europe, privatization is not the same as restructuring - making more efficient use of manpower in a company.

The Czech government budget has a surplus. But the country is running a trade deficit, Mr. Dlouhy says, probably in the range of 5 to 7 percent of GDP. He projects that this will continue for a few years to come. The government is pleased with the 10 percent growth rate in exports. But many observers are concerned that the appreciation of the Czech currency, the crown, is holding exports back.

The Czechs made the crown fully convertible in October. This cleared the last real hurdle for OECD membership.

The Czech Republic has had the same conservative government of Prime Minister Vaclav Klaus since June 1992, a stability seen as a virtue by many economists.

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