Czech Economy, Better Off Than Most in Eastern Europe, Faces Serious Problems

Along the main squares and the narrow pedestrian ways that make up so much of central Prague, there is something that sets the capital apart from its East European neighbors: The shops are full.

While shortages exist, four decades of Communist central planning have left Czech consumers far better off than their Polish or Hungarian counterparts.

Long lines may snake outside butcher shops and vegetable stores elsewhere in Eastern Europe, but here such essentials are available. In Prague, any lines are for Christian Dior perfume and Bohemian crystal.

This bounty of goods symbolizes an underlying economic strength that could enable Czechoslovakia to emerge from its long years of Communist domination faster and more successfully than any of the newly freed nations of Eastern Europe.

Certainly, the country has much going for it. Together with East Germany, it has a developed industrial tradition, providing the steel, the heavy machinery, the trucks and other finished industrialized products that kept much of the Soviet economic empire sputtering along.

Indeed, one of Czechoslovakia’s biggest drains in recent years has been a growing trade surplus with the Soviet Union, accumulated in useless, non-convertible rubles.

Its foreign debt, estimated at $6.7 billion earlier this year, is one of Eastern Europe’s lowest. Poland’s, for instance, is $39 billion.

Its work force has a sense of purpose and discipline that will be a major asset as the country begins again to compete in a free, open global economy. One of the great tactical triumphs of those who organized the downfall of the repressive Communist regime last month was to convince workers that a noon to 2 p.m. anti-government general strike was not going to ruin the economy.

But perhaps most importantly, Czechoslovakia is blessed with a group of astute, free-wheeling economic planners who have vaulted virtually as a group from their position as barely tolerated critics of communist central planning into key ministerial posts in the new transitional government.

Three of these individuals, First Deputy Prime Minister Valtr Komarek, Economics Minister Vaclav Klaus and minister without portfolio Vladimir Dlouhy, came from Prague’s 3-year-old Institute of Forecasting, an institute that survived only under the personal protection of the Communist former Prime Minister Ladislav Adamec, himself an advocate of economic reform.

All three men are free-market economists at heart and they are likely to move quickly to restructure the country’s economy.

Few analysts were surprised when, after less than two weeks on the job, the inexperienced new Communist Prime Minister Marian Calfa announced that only a free-market system could save the country.

Klaus, quick to remind visitors that he has been called the Milton Friedman of Czechoslovakia--a reference to the chief American proponent of free-market systems, has already announced plans to devalue the Czechoslovak crown by up to 75% as a first step to eventual convertibility.

In an interview with The Times a few days before his ministerial appointment, Klaus dismissed any thought of reconstructing a centrally planned economy, but argued that strong central authority was required to prevent destabilization.

“(Destabilization) is happening elsewhere in Eastern Europe because central authorities are losing macro-economic controls,” he said. “We need a powerful central bank and a cautious fiscal policy. This is absolutely crucial.”

In a signed article published last week in the Financial Times of London, Klaus talked of a gradual deregulation and a “careful nurturing of the market” toward the private sector, including opening to foreign investment.

“Efficient entry to the market is . . . crucial and cannot be achieved without opening the market to foreign competition and investors,” he wrote.

Klaus also warned that economic efficiency would decline during the transition period.

While Czechoslovakia may be better off than its East European neighbors, four decades of Communist rule have taken a terrible toll on an economy that in the years before World War II was among the most vibrant in Europe.

One West European diplomat estimated that more than $70-billion worth of unsold and unsaleable goods ordered up by central planners with no idea of consumer demands now languish in warehouses scattered around the country.

The value is roughly equivalent to an entire year’s national production.

“There is everything from obsolete textile machines to black-and-white television sets and clothes that no one wanted at the time and can’t be sold now,” said this diplomat. “Not even the Russians are taking this junk any more.”

Such mismanagement has contributed to the gradual, steady decline of a once-proud economy.

Czechoslovakia’s per capita national income, 10% higher than that of Austria before World War II, is now more than 30% below its Western neighbor.

“It was the third most important industrial country in Europe before the war (behind Britain and Germany),” commented a veteran Western diplomat here who specializes in economic matters. “Now it’s on a par with Belgium.”

Education levels have fallen steeply, and since the Soviet-led invasion in 1968, an estimated half-million Czechoslovaks--many of them highly talented--have emigrated to the West.

The country’s industrial strengths of the late 1930s have become the liabilities of the late 1980s, with virtually no investment to modernize antique mining, steel and metalworking facilities.

In the industrial city of Kladno northwest of Prague, parts of the giant Poldi steelworks remain unaltered since the 1890s.

“In most factories, the machines are older than the people who operate them,” commented this same diplomat. “Technology hasn’t moved for 30 years.”

This dearth of investment was exacerbated further in the final years of Communist rule as hard-liners channeled an increasing amount of the country’s capital to the purchase of consumer goods in an attempt to head off discontent at the lack of political freedom.

It was an unspoken social contract between the regime and the population that eventually failed, leaving the country’s industrial base further weakened.

Czechoslovakia’s weapons industry--producer of the explosive Semtex among other notables--which brought in lucrative hard currency earnings estimated at well over $100 million during the height of the Iran-Iraq War, has also fallen on hard times with the outbreak of peace in many parts of the world.

But together with retooling and restructuring its industry, many see Czechoslovakia’s biggest single economic problem as combating an industrial pollution problem widely acknowledged as the worst in the developed world.

Inefficient soft-coal power plants belch tons of sulfur into the atmosphere, providing energy for the country’s outdated heavy industry to do the same.

The result is choking pollution levels that have significantly lowered life expectancy in the industrial cities of northern Bohemia and decimated vast stretches of forest land in the country.

Any meaningful cleanup will cost billions of dollars that would be unavailable for desperately needed industrial restructuring, outside observers believe.

Despite these problems, however, the outlook for Czechoslovakia remains brighter than for the other nations of the region.

“We were a full-market economy and a full democracy between the wars,” one economist noted. “For many, this is in the living memory. We have a good chance to come back.”