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Macroeconomic Aspects of Transition

English Pages, 24. 10. 1999

1. Let´s carefully distinguish macroeconomic side of transition (in a narrow sense) and general or complex description of a transition economy. This difference is often misunderstood, but I do hope that the organizers of this conference really wish to talk at this session about macroeconomic issues.

2. The challenge for any transition economy in the macroeconomic field at the very beginning was manyfold:

- to minimize the inevitable economic decline which had to follow the fundamentally changed economic conditions (they were partly the result of the transformation strategy itself, partly the unintended consequence of the altered international environment);

- to eliminate the inherited excess demand (or forced savings) at the moment of price liberalization without initiating galloping inflation or even hyperinflation;

- to set the exchange rate at a level which would have made it possible to liberalize foreign trade without creating external imbalance.

3. Transition economies succeeded in the three above-mentioned tasks with mixed results. I have no ambition analyzing other countries as such analyses are usually very superficial and will instead concentrate on the Czech economy only.

The Czech Republic´s transformation shake-off led to a visible output loss: it amounted to 1/3 of industrial output, 1/4 of agricultural output and 1/5 of GDP. The figures are relatively high but they are lower than in most of the transition countries and, what is even more important, there was no way to avoid it.

Due to a lesser inflationary imbalance we “enjoyed” during the communist era and due to very cautious and restrictive macroeconomic policy after its end but prior to the price liberalization, the highest rate of inflation was “only” 57% (in the year of price liberalization) and it rapidly declined to a 10% annual rate in the following years.

As a result of restrictive monetary and fiscal policy and of sharp devaluation of the crown before the foreign trade liberalization, the dangerous trade imbalance did not take place and thus it was not necessary to stop its development by introducing administrative measures.

To summarize the above as regarding the first stage, we can say that we succeeded in avoiding price-wage-price or price-exchange rate-price spirals with fatal consequences which we had been afraid of so much.

4. The main feature of the second stage was the resumption of economic growth. In the Czech Republic

- it led to a real wage increase of 1/3;

- it did not undermine the position of the Czech crown;

- it was characterized by an extremely high investment ratio, by investments-saving imbalance, by growing trade deficit, by massive inflow of foreign capital and, gradually, by deteriorating balance of payments position.

Relatively rapid growth, balanced budget, low inflation, uninterrupted inflow of foreign capital, made us relatively comfortable and we did not see the first “warning” signals of the growing imbalance, which – in a small, open economy – leads not to domestic inflation but to balance of payments (current account) difficulties.

5. The task of the government, and especially of monetary authorities, was to slow down the growth of domestic aggregate demand and to ensure “a soft landing”. We did not succeed in it. The problem was not interpreted as a macroeconomic issue but as a “systemic failure” and in addition to it, the central bank made a fundamental mistake and its “overkill” destabilized the economy.

Standard anatomy of a currency crisis developed:

- first collapses within the banking sector;

- growing uncertainty among foreign investors (and especially speculators);

- economic growth started declining (with a standard lag after the change of monetary policy);

budget revenues began to fall, the government attempted to balance the budget by cutting expenditures (which contributed to the decline of demand);

- the attack on the crown followed (with the absence of pre-attack abandonement of fixed-exchange rate);

- 10% devaluation and the huge loss of currency reserves;

- political instability;

- extreme vulnerability of the banking and financial sector led to many bank failures;

- continuation (and even reinforcement) of the monetary restriction in the form of high real interest rates and of stricter reserve requirements (and other similar regulatory measures);

- credit crunch.

6. We are hopefully approaching the turning point based upon the growth of consumption and exports whereas the resumption of investments has not yet arrived. It depends on the change of climate in the banking sector. The change itself depends on accepting on the side of the central bank, foreign investors and international financial institutions that our banking problems reflect current macrosituation rather than the systemic issues. We are, however, far from reaching such consensus.

I hope this meeting will be a positive contribution in this respect.

Václav Klaus, Notes for Bohemiæ Conference, Prague, October 25, 1999.