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Political Economy of the Czech Republic
Professor Donald Fuller
21
st
May, 2008Tyrone Schiff
Political Economy of the Czech RepublicThe Czech Republic has a long and storied history. It is an ancient country thathas been involved in many of the most crucial events in European history. The 20
th
century in particular has been an interesting one for the Czech Republic. It has gone inand out of Communism, and finds itself currently in a transitionary stage along withmany of its neighboring states in Eastern and Central Europe. Aside from the fact thatits culture and government are transitioning, the economy is also doing the same. Thishas made the last decade or so a very interesting and significant portion of Czecheconomic activity. While there is a tremendous realm of activity that could be and ismonitored, this paper will only delve into a very specific set. In particular, I willexplore the debt and deficit that exists in the Czech Republic. I’ll discuss how thecountry’s debt came about, what is doing currently to finance it, and what some goodideas are for the future. In addition, I will look at the inflationary climate in thecountry. I’ll make comparisons to states that are in similar phases as the CzechRepublic, as well as provide analysis of the current and recent past of inflation in theCzech Republic. Of course, all of these elements mean nothing without knowing whatsort of impact they all have on the country. This will be a critical component of my paper, and I will discuss how each one of the economic figures influences the societyand country.Let us first tackle the issue of state debt in the Czech Republic. As of March2008, the state debt for the Czech Republic stood at 860.1 billion CZK ($54.02 billion) (Ministy of Finance).This number by itself doesn’t really make all that muchsense. It is better to disucss debt in terms of a country’s GDP, because then you canget a sense of how large that number truly is. The Czech Republic has a public debtequal to 31.1% of its GDP (World Fact Book). Compared to some of its neighbors, the2
Czech Republic can be seen as doing quite well in regards to state debt. Slovakia, itsneighbor to the east, at first glance may appear as though it is outperforming its old partner in terms of debt.This may be true on a dollar by dollar basis, but in fact, Slovakia has a publicdebt equal to 34.8% of its GDP, which is slightly worse than the Czech Republic.Germany’s public debt is at a whopping 65.3%, France 66.6%, and Hungary’s publicdebt stands at 70.2% of GDP (World Fact Book). In fact, the Czech Republic ranks73
rd
out of 126 countries in terms of its ratio of public debt to GDP, 126
th
having the best ratio (World Fact Book). Now that I’ve explained where the Czech Republic is in terms of its debtrelative to some other countries in Europe, I think it is pertinent to explain why andhow debt occurs. Essentially, “countries accumulate debt whenever they run a budgetdeficit” (iadb.org). Even more specifically, if there are greater public expendituresthan the country produces revenue, then there will also be an increase in public debt.The Czech Ministry of Finance goes even further in their definition of publicdebt. For instance, they break debt down into four different categories: domestic debt,foreign debt, marketable debt, and non-marketable debt. Marketable debt are thingslike treasury bills and treasury bonds. One of the easiest ways of accruing debt is by borrowing from another country, and thus adding to your foreign debt as the Ministryalludes to. This can have devastating effects if the borrowing country goes throughextreme inflation.Consider the example of borrowing $1 from the United States and paying for it with 16 CZK. If the Czech Republic goes through a significant inflationary periodand the country’s exchange rate spikes to 30 CZK for $1, paying that $1 back will be3
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