The Czech Republic has one of the most developed and industrialized economies in Central and Eastern Europe. Its strong industrial tradition dates to the 19th century, when Bohemia and Moravia were the industrial heartland of the Austro-Hungarian Empire. The Czech Republic has a well-educated population and a well-developed infrastructure.
The principal industries are motor vehicles, machine-building, iron and steel production, metalworking, chemicals, electronics, transportation equipment, textiles, glass, brewing, china, ceramics, and pharmaceuticals. The main agricultural products are sugar beets, fodder roots, potatoes, wheat, and hops. As a small, open economy in the heart of Europe, economic growth is strongly influenced by demand for Czech exports and flows of foreign direct investment (FDI).
At the time of the 1948 communist takeover, Czechoslovakia had a balanced economy and one of the higher levels of industrialization on the continent. In 1948, however, the government began to stress heavy industry over agricultural and consumer goods and services. Many basic industries and foreign trade, as well as domestic wholesale trade, had been nationalized before the communists took power. Nationalization of most of the retail trade was completed in 1950-51.
Heavy industry received major economic support during the 1950s, but central planning resulted in waste and inefficient use of industrial resources. Although the labor force was generally skilled and efficient, inadequate incentives for labor and management contributed to high labor turnover, low productivity, and poor product quality. Economic failures reached a critical stage in the 1960s, after which various reform measures were sought with no satisfactory results.
Hope for wide-ranging economic reform came with Alexander Dubcek's rise in January 1968. Despite renewed efforts, however, Czechoslovakia could not come to grips with inflationary forces, much less begin the immense task of correcting the economy's basic problems.
The economy saw growth during the 1970s but then stagnated between 1978-82. Attempts at revitalizing it in the 1980s with management and worker incentive programs were largely unsuccessful. The economy grew after 1982, achieving an annual average output growth of more than 3% between 1983-85. Imports from the West were curtailed, exports boosted, and hard currency debt reduced substantially. New investment was made in the electronic, chemical, and pharmaceutical sectors, which were industry leaders in Eastern Europe in the mid-1980s.
The "Velvet Revolution" in 1989 offered a chance for profound and sustained economic reform. Signs of economic resurgence began to appear in the wake of the shock therapy that the International Monetary Fund (IMF) labeled the "big bang" of January 1991. Since then, astute economic management has led to the elimination of price controls, large inflows of foreign investment, increasing domestic consumption and industrial production, and a stable exchange rate. Exports to former communist economic bloc markets shifted to Western Europe. Despite a general trend over the last 10 years toward rising budget deficits, the Czech Government's domestic and foreign indebtedness remains relatively low.
The Czech koruna (crown) became fully convertible for most business purposes in late 1995. Following a currency crisis and recession in 1998-99, the crown exchange rate was allowed to float. Recently, strong capital inflows have resulted in a steady increase in the value of the crown against the euro and the dollar. The strong crown has helped to keep inflation low. In 2004, inflation was about 2.8%, mainly due to increases in value added tax rates and higher fuel costs, and dropped to 1.9% in 2005. It hovered around 2.5% in 2006. The Ministry of Finance reported an inflation rate of 2.8% for 2007 and 6.3% for all of 2008, due to one-off tax changes and an increase in energy and food prices; however, this trend reversed in 2009, resulting in an inflation rate of 1.0%. The Czech Statistical Office reported inflation rates of 1.5% in 2010 and 1.9% in 2011. After a spike in 2012, inflation rates returned to 1.6% in 2013.
The Czech Republic is gradually reducing its dependence on highly polluting low-grade brown coal as a source of energy, in part because of European Union (EU) environmental requirements. The government has offered investment incentives in order to enhance the Czech Republic's natural advantages, thereby attracting foreign partners and stimulating the economy. Formerly state-owned banks have all been privatized into the hands of west European banks and oversight by the central bank has improved. The telecommunications infrastructure has been upgraded and the sector is privatized. The Czech Republic has made significant progress toward creating a stable and attractive climate for investment, although continuing reports of corruption are troubling to investors.
Its success allowed the Czech Republic to become the first post-communist country to receive an investment-grade credit rating by international credit institutions. Successive Czech governments have welcomed U.S. investment in addition to the strong economic influence of Western Europe and increasing investment from Asian auto manufacturers. According to the Ministry of Industry and Trade, the inflow of FDI fell from CZK 110 billion (roughly U.S. $5.7 billion) in 2008 to CZK 52 billion (roughly U.S. $2.7 billion) in 2009, mainly due to the economic slowdown. The inflow of FDI rebounded to CZK 117 billion (roughly U.S. $6.2 billion) in 2010, but it receded again in 2011 to CZK 95.6 billion (U.S. $5.41 billion), then spiking in 2012 up to CZK 223.3 billion (USD $11.6 billion). By U.S. Embassy estimates, the United States is among the top five investors in the Czech Republic since the revolution.
The Czech Republic boasts a flourishing consumer production sector. In the early 1990s most state-owned industries were privatized through a voucher privatization system. Every citizen was given the opportunity to buy, for a moderate price, a book of vouchers that he or she could exchange for shares in state-owned companies. State ownership of businesses was estimated to be about 97% under communism. The non-private sector is less than 20% today.
The Ministry of Labor and Social Affairs, which uses a different methodology than Eurostat, reported an 8.57% registered unemployment rate for 2011, a drop from 9.01% in 2010. It went down even further in 2012, to 7.4%, the seventh lowest of in the 27 EU member states. Rates of unemployment are higher in the coal and steel producing regions of Northern Moravia and Northern Bohemia, and among less-skilled and older workers.
After experiencing robust growth of around 6% from 2005-2007, the Czech Republic felt the impact of the global economic slowdown in 2009. The economy contracted in real terms by 4.1% in 2009 as the country's main export markets fell into recession, leading to a significant drop in external demand. Though unemployment figures still hover under 10%, 2010 saw an economic rebound for the country as export orders of industrial goods to Western Europe increased, and real GDP growth was reported as 2.2% by the Czech Statistical Office. In 2011, real GDP was 1.7%, though the economy contracted by 0.1% in each of the final two quarters of the year. By the end of 2012, GDP was contracting by 1.3%.
The Czech financial system remained relatively healthy during the global economic slowdown that started in 2008. The Czech Government had brought its budget deficit well within the 3% Maastricht criteria for euro adoption, reaching 0.6% of GDP in 2007 and 1.4% in 2008. Following the economic slowdown, however, and the resulting significant drop in tax revenues, the budget deficit reached 5.8% of GDP in 2009 and 4.8% of GDP in 2010. In 2011, the budget deficit dropped to 3.1% of GDP, then went back up to 4.4% in 2012. The Czech Government has yet to set a target date for euro adoption.
The Czech Republic became a European Union member on May 1, 2004. Most barriers to trade in industrial goods with the EU fell in the course of the accession process. The process of accession had a positive impact on reform in the Czech Republic, and new EU directives and regulations continue to shape the business environment. Free trade in services and agricultural goods, as well as stronger regulation and rising labor costs, has meant tougher competition for Czech producers. Future levels of EU structural funding and agricultural supports were key issues in the accession negotiations. Even before accession, policy set in Brussels had a strong influence on Czech domestic and foreign policy, particularly in the area of trade.
Challenges include transforming the economy from a strong reliance on manufacturing (especially the auto sector) toward a more diversified knowledge-based economy, reforming public procurement, increasing transparency, and reforming the pension and health care systems.
from a Warsaw Pact-era force of 200,000 to that of a NATO Ally whose 30,000 troops are more mobile, deployable, and interoperable. Major strides have been made in reforming the military personnel structure, and efforts are underway to increase the efficiency and transparency of the military acquisition system, and to improve the quality of long- and medium-range strategic planning. Compulsory military service ended in December 2004. After becoming a NATO member in 1999, the Czechs spent roughly 2% of GDP on defense through 2005; however, the defense budget has been gradually shrinking since then, and now represents barely 1% of GDP, with projected cuts threatening to take it well below 1% in the next 2 years.
U.S. Department of State. The Office of Website Management, Bureau of Public Affairs. U.S. Department of State. www.state.gov.