Political Economy of Reforms: The Czech Experience Pavel Mertl

1
Political Economy of ReformsThe 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 RD, 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

• J Political 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
• J Work ethics

4
Political Economy of Reforms
Weak points of Czech Republic

• L Weak (mostly minority) cabinets,
• L Structural problems high energy intensity,
  population ageing gt
  unsustainability of welfare state in the long run
• L Disintegrated RD base
• L Incompetitive university system
• L Inefficient government, red tapes to
  entrepreneurial activities
• L Welfare structure that disincentivizes labor
  insufficient pressure for economic activity
• L Slow and unpredictable justice
• L Substandard transparency, weak anti-corruption
• L Growing 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 didnt
  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 financní trhy
  (monthly, in Czech), Market Monitor mesícní
  prehled (monthly, in Czech), Strategy East
  (quarterly), Strategy Czech Republic (annually)
• Economic Research Department - contacts
• Pavel Mertlik (macro) tel. [phone],
  pavel.mertlik_at_rb.cz
• Helena Horska (macro, FX) tel. [phone]
  729, helena.horska_at_rb.cz
• Michal Brozka (macro, fixed income) tel. (420)
  221 141 498, michal.brozka_at_rb.cz
• Jindrich Svatek (stocks) tel. [phone]
  841, jindrich.svatek_at_rb.cz