Czechs Brace for Revamp

In contrast to its neighbors, the Czech Republic switches to free market with ease

ON a European continent wrenched by a recession in the West and radical reforms in the East, the Czech Republic stands relatively content in the middle. It has so far maintained political and social stability while undergoing drastic economic change.

By just about any measure, the Czech Republic can be considered the biggest economic success story among Eastern European nations trying to make the unprecedented switch to a market economy from a communist command system.

Nearly all Eastern European governments have stumbled, and some have retreated slightly on reform attempts since 1989, the year that totalitarian governments came crashing down throughout the region. But here, the fiscally conservative policies of Czech Prime Minister Vaclav Klaus have remained largely intact, even amid last year's peaceful partition of the former Czechoslovakia.

Unemployment, the scourge of the European Union, is relatively unknown in this nation of 10.5 million. The roughly 3.5 percent jobless rate is the Continent's second lowest behind Luxembourg.

Other favorable economic conditions in the Czech Republic include: a stable currency; a relatively low 1993 inflation rate of 18 percent, which is projected to fall further this year; and no significant foreign debt.

Czech government officials say foreign investment is pouring into the country, and trade with Western Europe is rising. Czech Central Bank figures show that foreign investment totaled about $455 million during the first nine months of 1993, one of the highest rates of investment per capita in Europe.

But despite all the bright statistics, many prominent figures in the nation's fledgling financial community say now is no time for self-congratulation. This nation still faces the daunting challenge of economic restructuring, experts and officials say.

``Right now there is a gap between stabilization and restructuring,'' explains Pavel Kavanek, chairman of Ceskoslovenska Obchodni Banka, the principal foreign trade bank of both the Czech and Slovak republics.

Among the challenges is an expected rise in unemployment. As market conditions develop, entire industrial sectors stand to be phased out and others to undergo consolidation. The Czech consumer electronics industry, for example, is one likely casualty. ``Everyone knows the Asians can make the products cheaper,'' says Michal Otradovec, a senior consultant with BIG, a Prague-based financial consulting firm.

Structural changes are likely to begin in earnest following the completion of the government's ambitious privatization program. The latest stage of that program was completed last December, when more than 6 million Czechs registered for vouchers to be used to buy shares in 770 companies worth an estimated $5 billion.

The Czech Republic's virtual dependence on Russian oil, provided via the Druzhba, or Friendship pipeline, is another cause for concern. The country's economy could suffer considerably if upheaval in Russia causes a prolonged pipeline stoppage.

Prague already has received a few scares. Last month, oil did not flow through the pipeline over a five-day period, reportedly because of a dispute between oil exporters and the Russian government over the granting of export licenses. And further disruptions are possible. The Russian government announced Feb. 9 that the nation's energy sector is on the verge of gridlock because industrial enterprises are not settling mutual debts.

The pipeline could potentially be used for political purposes by Moscow, which is hostile to the idea of its former client states joining the North Atlantic Treaty Organization. The Czech Republic is seeking rapid integration into Western European defense and economic structures, including NATO and the EU.

Hoping to avoid energy-related problems, the Czech government intends to build a second pipeline to Germany. Officials at Ceskoslovenska Obchodni Banka, one of the main financial backers of the pipeline project, say construction on oil storage facilities has already begun.

``Until this new pipeline is built, the Czech Republic will be vulnerable to Russian pressure,'' says bank spokesman Milan Tomanek. ``Having the second pipeline would be a guarantee that reforms will continue on the current course.''

Few top government officials are ready to say that the worst is over regarding the country's market transformation. However, historical and geographical factors, such as the Czech Republic's position as one of the most industrially advanced regions of Europe before World War II, are once again ready to work in the nation's favor, government officials say. ``We have Western traditions deeply rooted in our minds,'' says Miroslav Somol, deputy minister of industry and trade. ``It's just a matter of a short time before people remember these old traditions.''

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