Czechs carry problems to the rich men's table

BEFORE the First World War the area around Prague was an economic powerhouse, with 70 per cent of the Austro-Hungarian empire's industry. Between the wars the country, then including Slovakia, boasted an income per head equal to France's. Even under communist rule the federation maintained exemplary fiscal discipline.

Today the Czech Republic is champing at the bit to rejoin the world's leading economies. It is expected to be the next new member of the European Union. And 10 days ago it was flagged by the US as the frontrunner to enter the rich nations' club, the Organisation for Economic Co-operation and Development.

The transformation from a centrally planned economy has been startling. The Czechs already earn just 10 per cent less than the Greeks. Privatisation has extended to about 80 per cent of the economy, compared to the 2 per cent in private hands at the start of 1989.

Among its industrial giants are Skoda, Europe's second oldest car maker, and Tatra, a giant truck and tram works. It has an extensive steel industry, and its Plzenske Pivovary brewery makes the original Pilsner Urquell. Exports to the West have largely replaced its lost business in the former communist bloc. Its fastest-growing sector is tourism, with close to 20 million visitors strolling Prague's streets annually.

The country enjoyed GDP growth of 2.5 per cent last year, and should hit 5 per cent in 1995, according to the European Bank for Reconstruction and Development. Consumer inflation in 1994 was 10.2 per cent, compared to 32.2 per cent in Poland. The unemployment rate was only 3.2 per cent and the budget is balanced. Czechs, led by Prime Minister Vaclav Klaus, are eager to point out that with numbers like that, the reformation of the economy is all but over.

Others have doubts, particularly about the way privatisation was conducted. During the first phases, 100,000 properties seized by the communists were returned to their original owners while thousands of other small businesses were auctioned. The problem came when large state enterprises were traded for vouchers handed out free to every adult. Most of the shares were pooled into almost a dozen unit trusts, which have little experience analysing, let alone influencing, the firms in their portfolios. The industries themselves, left in the hands of their old apparatchik managers, received no new capital.

Those problems have been compounded by a foul climate for foreign investment, according to Dr Jan Vanous, an economist with PlanEcon Capital Group in Washington. "Mr Klaus's political line has been that the Czechs are smart enough to do most things on their own without the need to rely extensively on foreigners," Dr Vanous said. "They are arrogant. They think they can do everything."

Several large foreign investments are now in trouble. An expected $1bn (pounds 637m) cash injection into SPT Telecom, the local phone company, in return for a 27 per cent stake has been the subject of hot debate with nationalist shareholders. Three foreign directors were forced off the board of Tatra after failing to turn its results around. And a $200m redevelopment of Prague airport came unstuck when five Western companies walked out.

Combined more recently with international nervousness over the collapse of the Mexican peso, this has resulted in a 13-month slide in the Czech stock market. Aggregate market capitalisation is now just a third of the level it was just over a year ago.

Dr Vanous thinks that is about to turn around. "The likelihood of a 10-20 per cent rise in equity prices over the next several months is quite high. A rise of 30-40 per cent over the next year is possible." A fresh injection of Western capital, allowing new investment and imposing stricter limits on management, could be just what the economy needs.