IDEAS home Printed from
   My bibliography  Save this paper

The end of the Czech miracle? Currency crisis reveals need for institutional reforms


  • Buch, Claudia M.
  • Heinrich, Ralph P.


After years of high growth, low unemployment and low inflation, the Czech economy has suffered a sudden setback. Speculative attacks on the currency have forced the Central Bank to abandon its fixed exchange rate. The government has now announced austerity measures to reduce the massive current account deficit. In the short run, these measures will lead to lower growth and higher unemployment. Moreover, the devaluation of the Czech Koruna will make it more difficult to further reduce inflation. The crisis is due in part to the previous boom in domestic absorption. The expansion of absorption has been fuelled by massive capital inflows which helped to maintain the fixed exchange rate. At the same time, productivity growth has been sluggish despite high investment-to-GDP ratios, and wages have increased substantially despite sluggish productivity growth. These developments have contributed to the overvaluation of the exchange rate. As a result, the competitiveness of the tradables sector has been weakened, and the current account deficit has widened dramatically. The policy measures now announced aim at reducing domestic demand by cutting fiscal expenditure, raising taxes, devaluing the currency, and containing wage growth in the public sector. However, the government has so far failed to address the microeconomic issues that are at the heart of these supply-side problems. These include inefficiencies in financial intermediation, ineffective bankruptcy procedures, and weaknesses in the corporate governance of enterprises resulting from mass privatization. Solutions to the problems in the banking and financial sector should comprise tax incentives for banks to provision for loan losses, decentralized debt restructuring, the streamlining of bankruptcy proceedings, upgrading of the court system's resources, and a greater political will to enforce the existing bankruptcy legislation. Opening up for foreign banks more decisively and in particular allowing foreign banks to participate in the privatization of the large commercial banks can help to improve the efficiency of the banking system and the corporate governance role of banks. In order to encourage funds to manage their portfolios for the benefit of investors, funds should be encouraged to register as open-end unit trusts rather than as joint stock companies. On the macroeconomic level, the government is moving in the right direction. As regards the medium term outlook, fundamentals of the Czech economy remain strong. However, decisive and timely action to improve the institutional framework is needed if the economy is to overcome the present crisis and to reach a new, sustainable growth path.

Suggested Citation

  • Buch, Claudia M. & Heinrich, Ralph P., 1997. "The end of the Czech miracle? Currency crisis reveals need for institutional reforms," Kiel Discussion Papers 301, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkdp:301

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    2. A. W. Coats, 1995. "Comment," History of Political Economy, Duke University Press, vol. 27(5), pages 157-161, Supplemen.
    3. Edward A. Snyder & Roger C. Kormendi, 1996. "The Czech Republic's Commercial Bank: Komercni Banka," William Davidson Institute Working Papers Series 6, William Davidson Institute at the University of Michigan.
    4. Rudger Dornbusch & Ilan Goldfajn & Rodrigo O. Valdés, 1995. "Currency Crises and Collapses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 219-294.
    5. Langhammer, Rolf J. & Schweickert, Rainer, 1995. "The Mexican reform process: improving long-run perspectives and mastering short-run turbulences," Kiel Discussion Papers 255, Kiel Institute for the World Economy (IfW).
    6. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
    7. D. E. Moggridge, 1995. "Comment," History of Political Economy, Duke University Press, vol. 27(5), pages 87-91, Supplemen.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Piazolo, Daniel, 1997. "Gaining credibility and enhancing economic growth through regional integration: The case for EU membership of Eastern Europe," Kiel Working Papers 837, Kiel Institute for the World Economy (IfW).
    2. Siebert, Horst, 1997. "Reintegrating the reform countries into the world economy," Kiel Working Papers 829, Kiel Institute for the World Economy (IfW).

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:ifwkdp:301. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.