Note: Czechoslovakia divided to become The Czech Republic and Slovakia in January 1993.
1. General Policy Framework
Czechoslovakia is currently undergoing two fundamental economic transitions: movement toward a market economy and shifting its trade to the west. In 1990, Czechoslovakia liberalized foreign trade and investment, legalized private enterprise, and passed the legal framework for the important reforms which came into effect in 1991: decontrol of prices, partial convertibility and small business privatization. In January 1991, the government established internal currency convertability and devalued the crown sharply. At the same time, about 85 percent of prices were freed, while a further 10 percent were freed during the course of the year. January also marked the beginning weekly auctions of "small-scale" enterprises to private sector bidders. As of November 1991, nearly 19,000 small businesses had been privatized this way. A more complicated procedure will be used to privatize large-scale enterprises. By 1994, the government plans to privatize about 95 percent of the 4,000 "large-scale" enterprises, many of which functioned as monopolies in virtually all economic sectors. The government plans to do this in two waves; companies included in the first wave had to submit privatization plans to the government by October 1991 and their privatization should begin in early 1992. The second privatization wave is planned to begin in May 1992.
With the demise of the Council on Mutual Economic Assistance (CEMA) and traditional Soviet Bloc trading patterns, Czechoslovakia is moving rapidly toward bolstering trading relationships with the West. The government signed an association agreement with the European Community (EC) in December 1991. The government is also completely rebuilding Czechoslovakia's legal framework to make it compatible with western (particularly EC) business practices. A new commercial code will take effect in January 1992. In January 1993, a new EC-compatible tax code will be implemented. Czechoslovakia is also working on EC standardization in such areas as telecommunications, transportation, customs procedures, and environmental regulation.
To balance the economic influence of its west European neighbors, the Czechoslovak government and business sectors want to develop strong trade and investment ties with the United States. The U.S. and Czechoslovakia have now concluded a bilateral trade agreement, a bilateral investment treaty, an overseas private investment corporation agreement and have initialed a bilateral tax treaty.
Czechoslovakia's tough, IMF-endorsed economic stabilization program has been highly successful. Inflation, which was 60 percent for the first half year, was near zero for the third quarter of 1991. The current account is projected to record a $200 billion surplus, compared with a deficit of $2.5 billion projected in January 1991. The overall budget ended the year in deficit.
Economic reform and the shift in trading partners has been painful. Trade with the Soviet Union, traditionally Czechoslovakia's largest trading partner, fell about 40 percent in the first half of 1991. The national unemployment rate, nominally almost zero under Communism, is now 6.0 percent and rising, with levels of almost 4.0 percent in the Czech Republic and 10.3 percent in Slovakia. GDP fell about 9 percent in the first half of 1991 compared with the first half of 1990, and the decline is expected to total 12-15 percent by year end. In the first half of 1991, industrial production declined about 19 percent and retail sales about 30 percent. The Central Bank estimates that the economic decline will not bottom out until the second half of 1992, at the earliest.
2. Exchange Rate Policies
In January 1991, Czechoslovakia introduced partial convertibility of the crown under the Foreign Exchange Act of 1990. The Foreign Exchange Act permits domestic or foreign companies enrolled in the company register to freely exchange crowns for hard currency in business-related, current-account transactions. Current-account transactions include the import of goods and services, royalties, interest payments and dividend remittances. The U.S.-Czechoslovak Bilateral Investment Treaty which was signed in October 1991 provides for free transfers of all payments related to an investment (e.g. capital and earnings.) Capital-account transactions still require a foreign exchange license. Companies are obligated to exchange any foreign convertible currency they earn for crowns, but in exceptional cases, the state bank may grant permission to maintain a foreign-exchange account. Private persons do not need permission to have a foreign-exchange account.
Through a series of devaluations since 1989, the crown has decreased in value by half, making all foreign goods much more costly in terms of domestic currency. The crown is tied to a basket of trade-weighted currencies from Austria, Great Britain, Germany, Switzerland and the United States. Since January when the most recent devaluation occurred (80 percent), the crown/dollar rate has remained relatively stable at approximately 28-30 crowns per dollar. Parallel market exchange rates gradually converged during 1991.
3. Structural Policies
The transition from a centrally-controlled to a free market economy has required drastic changes in a wide range of legal and institutional structures. The major changes in 1991 are summarized below.
Prices: About 85 percent of prices were deregulated in January 1991. During the course of 1991, another 10 percent of prices were deregulated. Remaining price controls apply only to basic utility services, rents and sugar.
Taxes: The Czechoslovak tax system has been partially revised and a completely new tax code which will rely mainly on a European-style VAT and an income tax is expected to be in place by the beginning of 1993. Currently, enterprises pay a corporate income tax of 55 percent on income over 200,000 crowns (about $66,000). Enterprises with at least 30 percent foreign ownership pay 40 percent. Enterprises must also pay a 50 percent tax on the volume of employee wages and turnover tax on sales of goods. A bilateral tax treaty with the United States has been initialed. It will be signed in 1993 after the new Czech and Slovak Federal Republic (CSFR) tax code has been revised.
Privatization: Most of the legislation for privatizing state enterprises and cooperatives is in place and implementation is underway. Many enterprises have been or will soon be restored to their pre-Communist owners. About 19,000 out of 120,000 shops, restaurants and other small enterprises have been auctioned off. Privatization of large enterprises will take place in two waves beginning in the spring of 1992. Companies included in the first wave have already submitted privatization projects to the Ministries of Privatization for approval. These projects contain information about the way in which the company is to be privatized, its assets, etc. Enterprises may be privatized through auctions or direct sale to domestic or foreign investors or through a "voucher" scheme. Under the voucher scheme, each Czechoslovak citizen will be eligible to purchase vouchers, issued by the Minister of Finance and sold for 1,000 crowns (about one week's average wage), which can be exchanged for shares in state enterprises.
Regulatory Policies: Controls requiring licensing are in place for trading in arms and radioactive and nuclear materials, as well as sensitive dual-use technology.
4. Debt Management Policies
Czechoslovakia has one of the lowest foreign debts in central and eastern Europe. As of September 1991, the gross foreign debt was US$9.27 billion, up from $8.1 billion at the end of 1990. The rise in indebtedness is well within the limits specified by Czechoslovakia's agreement with the IMF. Czechoslovakia's financing needs for 1991 are estimated to be about $2.5 billion. The government has not fully drawn its line of credit with the IMF, World Bank, the EC and various governments. It is unlikely that new credit will need to be arranged until the second quarter of 1992. In November 1991, the state bank floated its first post-Communist bond issue on the international market. It was a $200 million issue with a three year maturity date, priced 3 percent above equivalent U.S. government securities. The interest rate reflects, among other concerns, market uncertainty about the outcome of the privatization process and questions about future responsibility for obligations of the state bank, should the Czechoslovak federation split.
5. Significant Barriers to U.S. Exports
As Czechoslovakia moves toward a free market economy, nearly all artificial barriers to U.S exports have been eliminated or weakened. Restrictions on the export of high technology western equipment under the jurisdiction of the Coordinating Committee on Multilateral Export Controls (COCOM) have been substantially reduced. Further liberalization under COCOM is anticipated as Czechoslovakia implements effective export controls for commodities to third countries. Additionally, U.S. legislative restrictions on trade with Czechoslovakia during the Communist era have been lifted. The United States granted Czechoslovakia provisional MFN status in November 1990. Czechoslovakia will soon have permanent MFN status. Also facilitating trade have been the abolition of state-owned, foreign trade monopolies in 1990 and the liberalization of foreign exchange restrictions in January 1991.
Remaining structural barriers include tariffs and controls on hard currency payments for imports. In October 1991, the Czechoslovak government amended an existing 15 percent customs surcharge for imported consumer goods and foodstuffs sold within the country. The surcharge was raised to 20 percent for commercial goods and was applied at 15 percent to private imports for personal use, with a duty free limit of $100. The Czechoslovak government has said it adopted this measure to conserve its limited foreign exchange reserves.
The government also plans to restructure its tariff rates to protect sensitive industries during the transition towards free markets and away from the Communist-era system of controlling imports administratively. In December 1991 the Czechoslovak government received a GATT waiver to increase its overall tariff base from 5 percent to 5.7 percent. While this increase appears nominal, there was substantial opposition by GATT members to a permanent increase in Czechoslovakia's tariffs because of substantial increases on tariffs on products which represent promising import markets. Czechoslovak officials have given verbal assurances that their government will participate fully in GATT to lower tariff rates over the next decade, as economic conditions in Czechoslovakia permit. There is concern in the U.S. and elsewhere that permanently higher tariffs, coupled with trade liberalization under the EC association agreement, will disadvantage non-EC exports to Czechoslovakia. The U.S. will continue to negotiate with CSFR for a phased reduction of the tariff increases on goods for which the United States is a principle supplier.
Although Czechoslovakia now has partial convertability and may move to unrestricted convertability within several years, access to hard currency for import payments remains problematic. Under current foreign exchange laws, which are implemented by the state bank, payments of over $200,000 will normally take three months. Importers must take out a one year loan for amounts between $200,000-$500,000; a two year loan for amounts between $500,000-$1,000,000; and a four year loan for over $1,000,000. While banking laws will be liberalized in early 1992, it remains unclear how this practice might be affected.
The promotion of U.S. investment in Czechoslovakia has been assisted by the October 1991 signing of the U.S.-Czechoslovak Bilateral Investment Treaty (BIT) and an Overseas Private Investment Corporation (OPIC) agreement. Under the new commercial code going into effect in January 1992, government approval of foreign investment no longer will be required, except for the direct sale of government equity. While the Czech Republic government would like to restrict ownership of a limited number of profitable Czech companies to Czechoslovak citizens, the federal government and Slovak Republic take the position that all domestic enterprises now being privatized should be open to foreign investment. The number of U.S. businesses with representatives in Czechoslovakia (nearly all in Prague) has grown from three when the Communist regime fell in November 1989 to approximately 175 as of November 1991.
6. Export Subsidy Policies
The Czechoslovak government established a $100 million fund in May 1991 to assist with the transition to a market economy through the remainder of the year, of which $18 million was for general export subsidies. In November, the central bank announced that it plans to implement 30 specific measures to support exports. The details of this package are not yet known.
7. Protection of U.S. Intellectual Property
Czechoslovakia is a party to the Bern, Paris and Universal Copyright Conventions. While the Czechoslovak record on protection of intellectual property generally has been satisfactory, the U.S. government is aware of one alleged trademark violation and one alleged patent violation which are currently under negotiation between U.S. firms and the Czechoslovak enterprises. Both cases involve alleged violations by Czechoslovak enterprises over a long period of time. The Embassy notes concern on the part of some potential investors, notably the pharmaceutical and recording industry, that current intellectual property laws are inadequate protection for investment in local manufacturing. The government is currently drafting new intellectual property rights legislation.
8. Worker Rights
a. The Right of Association
The Constitutional Law of 1991 guarantees all workers in Czechoslovakia the right to form and join unions of their own choosing without prior authorization. Over 70 percent of workers are estimated to be members of labor organizations. Most workers in the CSFR are members of unions affiliated with the democratically oriented Czech and Slovak Confederation of Trade Unions (CSFOS). Workers, except those in what are described as essential services, have the right to strike. Strikes during 1991 were rare, of short duration, and affected only small numbers of workers. Mediation and arbitration of collective bargaining disputes is mandated for workers who are not permitted to strike. Unions and labor federations are independant of the government and political parties and may affiliate with international bodies. In 1991 the government decided to expel the world headquarters of the Communist-dominated World Federation of Trade Unions, but the decision is being appealed.
b. Right to Organize and Bargain Collectively
A charge of anti-union discrimination may be filed with the Ministry of Labor and Social Affairs, and the Ministry may impose fines on those found to have violated the anti-union discrimination prohibition. Victims of anti-union discrimination may also institute proceedings in CSFR courts. The courts may issue injunctions against anti-union activities, as well as order reinstatement of dismissed workers and payment of back wages and other damages. A new collective bargaining law went into effect in Czechoslovakia in 1991. Substantial numbers of collective bargaining contracts were completed within the framework of the new law, but trade union officials noted that the ongoing process of converting government-owned enterprises to private enterprises on occasion make it difficult to identify employer representatives with whom to bargain.
c. Prohibition of Forced or Compulsory Labor
Forced or compulsory labor is expressly prohibited in a constitutional law on basic rights and freedoms adopted in January 1991.
d. Minimum Age for Employment of Children
Generally individuals must be 16 years of age before they may work, but individuals who are 15 years of age and have completed elementary school may work. Individuals who have completed the course of study at "special schools" (schools for persons with severe disabilities) may work at the age of 14. Workers younger than 16 years of age may work no more than 33 hours per week. There is no evidence that children in the CSFR engage in street trading, maritime, plantation or domestic work, work in sweatshops, or dangerous work.
e. Acceptable Conditions of Work
A standard work week of 42.5 hours per week is mandated by law. By law, a worker is also entitled to three or four weeks paid vacation annually. Overtime may not exceed 150 hours per year or 8 hours per week, without special permission from the ministry overseeing the industry. The Slovak and Czech offices of labor safety and the federal Office of Standards and Measurement enforce health and safety standards. Under the Communist regime, advances in occupational health and safety conditions failed to keep pace with conditions in the West. Government offices charged with the maintenance of health and safety standards are attempting to correct past deficiencies. Officials believe that workplace safety conditions have continued to deteriorate since the 1989 revolution. Obsolete industrial equipment complicates efforts to improve occupational safety and health.
f. Rights in Sectors with U.S. Investment
U.S. investment in Czechoslovakia is still very low and is present in only three of the nine goods producing sectors listed: food and related products, chemicals and related products and electric and electronic equipment. Conditions in these sectors are comparable to conditions in other sectors.
Source: National Trade Data Bank, Agency: U.S. Department of State