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Inflation and Deflation in the Czech Republic since 1998 - Essay Example

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The state of Czech Republic had gone through different turns in history. These changes have surely affected the progress of its economy both positively and negatively. Czech was actually part of Austro Hungarian Empire until World War I in 1918. Later it became part of Czechoslovak state…
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Inflation and Deflation in the Czech Republic since 1998
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Download file to see previous pages Czechoslovak was famous for export industries, especially automotive ones then. But the major policy change stopped the export growth of the state. Even though the following governments tried some measures to keep economy strong, nothing could help. The Communist Regime allowed only state owned enterprises and state lead economic planning. It relied more on artificial pricing of commodities. No political, cultural or economic liberalization was allowed. Year after year the situation became worse only and it led to a total tragedy within a few decades.
By 1980s, Czechoslovakia started facing deep crisis and people started protesting. In the initial days the protests were not so strong and the Government tried to suppress it. But it was not possible. Protests gathered momentum and by 1989 the Communist Government resigned. It was followed by democratic election which was the beginning of a new era as far as the history of Czechoslovakia is concerned. The major policy change in USSR allowing liberalization at to a limited extent and the weakening of power of Communists in neighboring states like East Germany and Poland also influenced the developments which led to the situation of Communists loosing power in Czechoslovakia.
In the elections conducted in 1990, Vclav Havel got elected as President. The new Government formed under his leadership decided anyway to march away from the track of Communism. Policy was framed to strengthen economy following the footsteps of the already developed economies. Free market and privatization were introduced in the state for the first time. This change could create some positive signs in economy. Both Czech and Slovakia got independent prime ministers according to federal structure and later they decided to part and remain two separate independent states. Thus on 1993 January First Czech became a sovereign republic. Soon the state started making remarkable growth in its economy. But unfortunately good days didn't last long. By 1997 Prime Minister was ousted from power and this political stability along with other issues took the state to a deep economic crisis. The speculative attack on Koruna in May 1997 stopped the growth signs of economy. This made the Czech economy 'stagflant' which led to major issues like loss of employment, lesser production, acceleration of deflation, etc.
But the political leadership continued the attempt to lead the state to prosperity. They made a shift in the nature of foreign trading. More concentration was put in trade with the Western countries whereas it was towards the East earlier. For creating enough fund for various activities, Czech relied on international funding agencies. They could successfully manage to get both grants and loans from institutions like World Ban, International Monetary Fund, European Bank for Reconstruction and Development, the European Investment Bank, etc. External debt in 1999 was about 24.3 billion Dollars. Since major share of this loan amount was used for nothing but building up the nation's economy itself, indirectly the loan burden was supporting the prosperity of the state. The fact that Czech could repay some loans before schedule makes it undoubtedly clear that the policy change was going in the right direction.
In 1999 inflation was very less, average rate being 2.1 % only. The significant fall in inflation cannot be seen just as the after effect of internal policies or situation alone. The deflation in other ...Download file to see next pagesRead More
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