On February 28, 2006, the Czech Republic "graduated" from the World Bank. The graduation officially ends the transformation of the Czech economy from communism to capitalism. The speed with which the Czechs moved out of the communist doldrums to being a relatively fast-growing and increasingly prosperous free market economy is a tribute to the efficacy of its economic reforms in the 1990s. With the June parliamentary elections approaching, the graduation is a timely reminder on how well the once-derided market reforms worked. It is also a reminder that economic liberalization is an ongoing process and much work remains if the Czech Republic is to become one of the world's freest economies.
The World Bank graduation is both a practical and a symbolic act. On a practical level, it means that a graduate country can no longer qualify for World Bank's loans and may, in time, become a donor nation. On a symbolic level, graduation means that a country has joined a club of credit-worthy countries with sound economic and political institutions. The per capita income necessary to trigger graduation is $5,445 at 1997 prices. To date, only one other post-communist country, Slovenia, managed to graduate from the World Bank.
Following the 1989 Velvet Revolution and the collapse of communism, the Czechs began liberalizing in earnest. Under the leadership of President Vaclav Klaus, who was first the finance minister of Czechoslovakia and then prime minister of the Czech Republic, the government got rid off thousands of orders and bans, allowed Czech and foreign citizens to enter the market, liberalized prices and foreign trade, and privatized many of the state enterprises. Klaus left office in 1997 and was replaced by a succession of socialist prime ministers. The liberalization of the Czech Republic was far from over, but much has been achieved. According to the Fraser Institute's Economic Freedom of the World: 2005 Annual Report, Czechs moved from complete state control of the economy in 1989 to 44th freest economy in 2003. Thus, after six years of socialist rule, the Czech Republic continued to be the third freest Soviet bloc economy (after Estonia and Hungary).
During the 1990s, Czech reforms were criticized for their severity. Many, including the hero of the Velvet Revolution and the former Czech President Vaclav Havel, believed that "shock therapy" should give way to a more gradualist approach. But, as Klaus put it in a recent Cato paper, rapid economic reforms were intended get the Czech economy on a path to economic growth as soon as possible. "We tried to achieve the best possible shape of the proverbial J-curve," he wrote. "If we were to create our own... index showing the losses suffered by the Czech economy because of transformation, I am confident that it would be the most favorable such measure among all the transforming countries."
Today it seems that Klaus was right. The Czech economy bounced back very quickly. Speaking on Czech Television, the World Bank President Paul Wolfowitz acknowledged Klaus' pivotal role in the Czech economic transformation. He said, "The Czech republic graduated from needing World Bank assistance because of remarkable economic progress made since the Velvet Revolution, and especially in the last few years under the leadership of Vaclav Klaus."
Klaus's reforms, it should be noted, were more conducive to spurring economic growth than was the foreign aid that the Czech Republic received. Between 1991, when the Czechs joined the World Bank, and their 2006 graduation, the Czechs have received $626 million in World Bank loans. That amounts to $41.7 million per year or $4 per capita per year. In terms of overall foreign aid, the Czechs received a mere $22 per capita per year (in current dollars) between 1992 and 2003.
Contrast that with the development path of East Germany following its reunification with West Germany. Instead of deep economic reforms, East Germany relied on large financial transfers from West Germany to stimulate her growth. Between 1990 and 2004, East Germany received $1.5 trillion (in 2004 dollars) in financial transfers from West Germany and the European Union. Out of the population of 82 million, 14 million Germans lived in the East. That means that the German government has spent an estimated $7,142 per person per year in the East.
Today, East Germany is considered an economic failure. A panel of experts, which was charged by the German government with examining the reconstruction of Germany's eastern states, concluded that "aid has done little to help the economically depressed region." The experts also concluded that "the economy in the new German states has been growing more slowly than in the West for years. The catch-up process has stalled, leading to an ever-widening gap between East and West."
With the Czech parliamentary elections around the corner, Czech voters will be given a choice between the Civic Democratic Party that Klaus once headed and the socialists. The Czech "graduation" from the World Bank should remind the Czech electorate about the importance of economic reforms. They should also remember that economic liberalization is an ongoing process. With other countries in Central Europe and beyond liberalizing their economies, the Czech Republic cannot afford to be left behind.
Marian L. Tupy is assistant director of the Cato Institute's Project on Global Economic Liberty.