ECONOMICS

Main Crops: Wheat, barely, oat, grapes, olives

Natural Resources: Crude oil natural gas, iron ore, phosphates, uranium

Major Industries: Petroleum, light industries, natural gas, mining

Of the former communist countries in central and eastern Europe, the Czech Republic has one of the most developed and industrialized economies. Its strong industrial tradition dates to the 19th century, when Bohemia and Moravia were the industrial heartland of the Austro-Hungarian Empire. The Czech Republic has a well-educated population and a well-developed infrastructure, but much of its industrial plant and equipment dating from communist days is obsolete. The country's strategic location in Europe, low-cost structure, and skilled work force have attracted strong inflows of foreign direct investment. This investment is rapidly modernizing its industrial base and increasing productivity.

The principal industries are motor vehicles, machine-building, iron and steel production, metalworking, chemicals, electronics, transportation equipment, textiles, glass, brewing, china, ceramics, and pharmaceuticals. The main agricultural products are sugarbeets, fodder roots, potatoes, wheat, and hops.

The "Velvet Revolution" in 1989 offered a chance for profound and sustained economic reform. Signs of economic resurgence began to appear in the wake of the shock therapy that the International Monetary Fund (IMF) labeled the "big bang" of January 1991. Since then, astute economic management has led to the elimination of 95% of all price controls, large inflows of foreign investment, increasing domestic consumption and industrial production, and a stable exchange rate. Exports to former communist economic bloc markets have shifted to western Europe. Thanks to foreign investment the country enjoys a positive balance-of-payments position. Despite rising budget deficits, the Czech Government's domestic and foreign indebtedness remains relatively low.

The Czech koruna (crown) became fully convertible for most business purposes in late 1995. Following a currency crisis and recession in 1998-99, the crown exchange rate has been allowed to float. Recently, strong capital inflows have resulted in a steady increase in the value of the crown against the euro and the dollar. The strong crown has helped to keep inflation remarkably low at 0.1%, but is causing worries to exporters whose price competitiveness is adversely affected.

The Czech Republic is reducing its dependence on highly polluting low-grade brown coal as a source of energy. In 2003, fossil fuel plants accounted for 56% of the nationÕs energy. Two nuclear plants contributed 42.5% and hydro plants the remaining 1.5%. Norway (via pipelines through Germany) and Russia supply the Czech Republic with liquid and natural gas.

The government has offered investment incentives in order to enhance the Czech Republic's natural advantages, thereby attracting foreign partners and stimulating the economy. Shifting emphasis from the East to the West has necessitated adjustment of commercial laws and accounting practices to fit Western standards. Formerly state-owned banks have all been privatized into the hands of west European banks and oversight by the central bank has improved. The telecommunications infrastructure has been upgraded. The Czech Republic has made significant progress toward creating a stable and attractive climate for investment, although continuing reports of corruption are troubling to investors.

Its success has enabled the Czech Republic to become the first post-communist country to receive an investment-grade credit rating by international credit institutions. Successive Czech governments have welcomed U.S. investment, in particular, in addition to the strong economic influence of western Europe, especially Germany. Inflows of foreign direct investment in 2001 were an estimated $4.5 billion to $5.0 billion (approximately 9% of gross domestic product, or GDP). The United States is the third-largest foreign investor in the Czech economy, behind Germany and Netherlands.

The Czech Republic boasts a flourishing consumer production sector. In the early 1990s most state-owned industries were privatized through a voucher privatization system. Every citizen was given the opportunity to buy, for a moderate price, a book of vouchers that he or she could exchange for shares in state-owned companies. State ownership of businesses was estimated to be about 97% under communism. The non-private sector is less than 20% today.

Unemployment was running about 8.5% through 2001. It increased to 9.4% in January of 2002 and was at 10.1% at the end of 2003. It impacts mainly less-skilled and older workers.ÊThe economy grew by an estimated 3.5% in 2001 and, although final figures are not yet available, is expected to grow around 3% for 2002; but an increasing government budget deficit and indebtedness could threaten stability in the medium to long term. Excluding privatization revenues, the overall government deficit increased to 5.2% of GDP in 2001 from 4.4% in 2000.
Today Czechia is a prosperous market economy that boasts one of the highest GDP growth rates and lowest unemployment levels in the EU, but its dependence on exports makes economic growth vulnerable to contractions in external demand. Czechia’s exports comprise some 80% of GDP and largely consist of automobiles, the country’s single largest industry. Czechia acceded to the EU in 2004 but has yet to join the euro-zone. While the flexible koruna helps Czechia weather external shocks, it was one of the world’s strongest performing currencies in 2017, appreciating approximately 16% relative to the US dollar after the central bank (Czech National Bank - CNB) ended its cap on the currency’s value in early April 2017, which it had maintained since November 2013. The CNB hiked rates in August and November 2017 - the first rate changes in nine years - to address rising inflationary pressures brought by strong economic growth and a tight labor market.

Since coming to power in 2014, the new government has undertaken some reforms to try to reduce corruption, attract investment, and improve social welfare programs, which could help increase the government’s revenues and improve living conditions for Czechs. The government introduced in December 2016 an online tax reporting system intended to reduce tax evasion and increase revenues. The government also plans to remove labor market rigidities to improve the business climate, bring procurement procedures in line with EU best practices, and boost wages. The country's low unemployment rate has led to steady increases in salaries, and the government is facing pressure from businesses to allow greater migration of qualified workers, at least from Ukraine and neighboring Central European countries.

Long-term challenges include dealing with a rapidly aging population, a shortage of skilled workers, a lagging education system, funding an unsustainable pension and health care system, and diversifying away from manufacturing and toward a more high-tech, services-based, knowledge economy.