EVERYTHING WAS GOING WELL SO WE DECIDED TO TINKER WITH THE MECHANISM. MAYBE WE SHOULD HAVE LET WELL ENOUGH ALONE

The Czech Republic, historically Eastern Europe’s supreme success story, may just have started believing its own press releases and become too complacent. In retrospect, the Czech Republic's early success was accomplished mainly through the use of slight of hand and mirrors. The nation's banks acquired the original privatized companies, the only source of funds large enough to write the check. The government owned the banks and thus no privatization had occurred at all. Czech banks used investment funds to make their contribution to privatized companies and in many cases merely stripped the companies of their assets leaving minority shareholders with nothing.

When it became time to pare the bloated employment roles of these companies to make them competitive, bureaucrats were not up to the effects of massive unemployment determined to leave the status quo alone. Tricky accounting for a time was able to show that the Czech's had indeed accomplished a miracle that was envied by all of Eastern Europe, when in effect all that had happened was the fact that the problem had been pushed forward into time for another government to address.

The euphoria that accompanied the Czech success brought a swarm of investors into the country that made the prophecy temporarily self-fulfilling. Effectively, because nothing had really changed, the entire scenario was an enormous hoax and they only pushed forward the day of reckoning. Investors that had been duped will think more than twice before being taken for a ride again by the Czech illusion. The country has suffered a slowdown in its industrial production, new construction has been lagging and the national deficit has been rising unchecked. Stock market and bank financial irregularities abound coupled with labor bloated industrial complexes. A combination of these factors has frightened foreign investors and the country, as a whole is moving backward instead of forward.

In probably in the most outlandish cut of all, Prime Minister Vaclav, Eastern Europe's longest-serving government leader and premier reformer was summarily dumped for accepting a substantial political donation from a 13 year deceased occupant of a cemetery plot and a Mauritian who can't even spell Czech Republic. This comes on top of fact that President Vaclav Havel, a former playwright, has already lost a lung to cigarettes and cancer and although he will be reelected to office, his health is extremely precarious.

The city of Prague has been invaded by skinheads and Nazi like incidents against Gypsies are becoming legion. The European Center for the Rights of Roma has reported more than 1,250 attacks on Gypsies in the last several years and the situation has become so bad that they have begun an exodus from the country. With a population of almost 300,000, the Gypsies, no longer sanguine about their safety, have caused a clamor for asylum and the allied visa problems have potentially jeopardized the country's entry into the European Union.

The current account deficit has mushroomed resulting in a substantial currency devaluation coupled with almost a stoppage of domestic growth.   The Government’s lack of leadership and indecision has reinforced international views that stronger medicine must be taken.

“What’s more, the currency tinkering won’t fix the country’s broader problem with competition. While the Czech Republic got off to a fast start in the early 1990s with trade liberalization and open markets, it has failed to take the more painful steps of restructuring and layoffs. Businesses that have been privatized tend to be unproductive and overstaffed with senior management and pruning is difficult if not impossible.

The largest companies were privatized under a mass voucher system, which transferred ownership but didn’t bring in new capital or management with restructuring expertise. As a result, many of the country’s largest companies remain mired in inefficiencies. The Czech unemployment rate is an artificially low 4%, driving up real wages last year 16%. In contrast, Poland and Hungary have undergone more extensive corporate reforms, resulting in wage declines and higher unemployment. “’The Czechs are going to have to pay the same price as their neighbors,’ said Zdenek Lukas, economist at the Vienna Institute for Comparative Economic Studies.

“The country’s banks are also suffering from a lack of safeguards. This month, two top-ranking officers of Investicni a Potovni Banka AS, the nation’s third-largest bank, were detained on charges of embezzlement and insider dealing. Also this month, 11 high-ranking officials of the Motoinvest Investment group and Agrobanka AS were detained by police on charges of manipulating assets and embezzlement. “ The Wall Street Journal, Robert Frank A12, May 28-9, 1997.

President Havel is an eloquent speechmaker and as such is in tremendous demand on the European diner circuit with his Stevensonish sense of timing and humor. His was not up to his humorous best when commenting on the current group of thugs making up the Czech Republic's Government. "The declared ideal of success and profit was turned to ridicule because we allowed a situation in which the biggest success could be achieved by the most immoral ones and the biggest profits could go to unpunishable thieves."  He went on to proselytize the fact that the entire system had failed because the country was caught in a vicious circle of corporate deficits being funded by bank loans, which in turn created an atmosphere that nurtured bureaucratic incompetence 

He went on to describe his society as almost drone-like when stating, "I am afraid this is a sphere where we have most of our debts to pay and most of our work to do. Culture in the broadest sense is not measured by the number of splendid rock stars who visit this country, or by the beauty of dresses by prominent designers presented here by world-class models, society is synthesized by what is "chanted by skinheads in a pub, by the number of lynched or murdered Romany ([1]) people, by the dreadful behavior of some of our people toward their fellow humans simply because of the different color of their skin  

In the too little, to late department, the Czech government announced plans to cut spending and freeze public sector wages, hardly a panacea for their world class trading imbalance, coupled with uncompetitive exports and a mismanaged banking system. The increased inflation, higher unemployment and economic contraction associated with these moves hardly provides inspiration for other struggling Eastern Bloc Nations in their attempts at monetary independence.

NOW THAT WE HAVE FIXED THE ECONOMY, WE ARE GOING TO FIX THE STOCK MARKET AS WELL

As long as they were cleaning house anyway, the Government promised to adopt American style securities regulations to a system riddled with fraud. An endless procession of senior banking officials, along with investment fund managers have been charged with embezzlement and looting, causing already nervous markets to plummet.

Vaclav Klaus, Czech Prime Minister, spoke too soon when he announced two years ago that “the transformation of the Czech economy was complete.”