The Czech Republic has a developed export-oriented social market economy. It is based in services, manufacturing, and innovation that maintains a high-income welfare state and the European social model.Christian Aspalter, Kim Jinsoo, Park Sojeung. Analysing the Welfare State in Poland, the Czech Republic, Hungary and Slovenia: An Ideal-Typical Perspective. Published on 10 March 2009. DOI: 10.1111/j.1467-9515.2009.00654.x The Czech Republic participates in the European Single Market as a member of the European Union, and is therefore a part of the economy of the European Union. It uses its own currency, the Czech koruna, instead of the euro. It is a member of the Organisation for Economic Co-operation and Development (OECD). The Czech Republic ranks 16th in inequality-adjusted human development and 24th in World Bank Human Capital Index, ahead of countries such as the United States, the United Kingdom or France. The Czech Republic ranks 7th – 10th among the world’s most diversified economies in the Economic Complexity Index.
The industry sector accounts for 37% of the economy, while services account for 61% and agriculture for 2%. The principal industries are high tech engineering, electronics and machine-building,Market Information: Sectors and Products. . Businessinfo.cz steel production, transportation equipment (automotive, rail and aerospace industry), chemicals, advanced materials and pharmaceuticals. The major services are research and development, ICT and software development, nanotechnology and life sciences. Its main agricultural products are cereals, vegetable oils and hops.
the Czech GDP per capita at purchasing power parity is $50,961 and 698,706 Czech crowns ($31,368) at nominal value. the unemployment rate in the Czech Republic was the lowest in the EU at 2.6%, and the poverty rate is the second lowest of OECD members, following Denmark. The Czech Republic ranks 21st in the Index of Economic Freedom (ranked behind Chile), 32nd in the Global Innovation Index (ranked behind Portugal), 32nd in the Global Competitiveness Report, 41st in the ease of doing business index and 25th in the Global Enabling Trade Report (ranked behind Canada). The largest trading partner for both export and import is Germany, followed by other members of the EU. The Czech Republic has a highly diverse economy that ranks 7th in the 2019 Economic Complexity Index.Economic Complexity Rankings (ECI) . The Atlas of Economic Complexity. Retrieved 3 October 2017.
History From industrialisation to communism (1800-1989)
The Czech lands were among the first industrialized countries in continental Europe during the German Confederation era. The Czech industrial tradition dates back to the 19th century, when the Lands of the Bohemian Crown were the economic and industrial heartland of the Austrian Empire and later the Austrian side of Austria-Hungary. The Czech lands produced a majority (about 70%) of all industrial goods in the Empire, some of which were almost monopolistic.
After the First World War, the Austrian-Hungarian Empire collapsed and independent Czechoslovakia was created. Czechoslovakia had way too big industrial production for a small internal market and it missed the big market of the former Empire. The Czechoslovak crown was introduced in April 1919 at a 1:1 ratio to the Austro-Hungarian currency, it became one of the most stable currencies in Europe. It is a widespread myth among Czechs that the First Republic belonged to the 10 most developed economies of the world. In fact it had the 14th highest GDP per capita in the world. The Czech part (without Slovakia and Transcarpathia) had a similar GDP per capita in the 1920s to Germany and Belgium, which was higher than that of the crisis-struck Austrian First Republic.
The consequences of the 1938 Munich Agreement and subsequent Nazi Germany occupation were disastrous for the economy. After the occupation and forced subordination of the economy to Nazi German economic interests, the crown was officially pegged to the mark at a ratio of 1:10, even though the unofficial exchange rate was 1 to 6-7 and Germans immediately started buying Czech goods in large quantities.
After the World War II and the Communist Coup d'état were all the economies of the socialist countries tightly linked to that of the Soviet Union, in accordance with Stalin's development policy of planned interdependence. Czechoslovakia was the most prosperous country in the Eastern Bloc, however it was during the decades overtaken not only by Austria or Finland but also Southern European economies like that of Italy, Spain or Greece.
1989–1995 The "Velvet Revolution" in 1989, offered a chance for profound and sustained political and economic reform. With the disintegration of the communist economic alliance in 1991, Czech manufacturers lost their traditional markets among former communist countries in the east. Signs of economic resurgence began to appear in the wake of the shock therapy that the International Monetary Fund (IMF) labelled the "big bang" of January 1991. Since then, consistent liberalization and astute economic management has led to the removal of 95% of all price controls, low unemployment, a positive balance of payments position, a stable exchange rate, a shift of exports from former communist economic bloc markets to Western Europe, and relatively low foreign debt. Inflation has been higher than in some other countries – mostly in the 10% range – and the government has run consistent modest budget deficits.
Two government priorities have been strict fiscal policies and creating a good climate for incoming investment in the republic. Following a series of currency devaluations, the crown has remained stable in relation to the US dollar. The Czech crown became fully convertible for most business purposes in late 1995.
In order to stimulate the economy and attract foreign partners, the government has revamped the legal and administrative structure governing investment. With the breakup of the Soviet Union, the country, till that point highly dependent on exports to the USSR, had to make a radical shift in economic outlook: away from the East, and towards the West. This necessitated the restructuring of existing banking and telecommunications facilities, as well as adjusting commercial laws and practices to fit Western standards. Further minimizing reliance on a single major partner, successive Czech governments have welcomed U.S. investment (amongst others) as a counterbalance to the strong economic influence of Western European partners, especially of their powerful neighbour, Germany. Although foreign direct investment (FDI) runs in uneven cycles, with a 12.9% share of total FDI between 1990 and March 1998, the U.S. was the third-largest foreign investor in the Czech economy, behind Germany and the Netherlands.
Czech high export profile has made it tightly woven into both European and global markets and supply chains, which has contributed to its relatively low unemployment. A large part of the Czech industrial economy is tied to German demand, with 33% of its exported goods going to its neighbor to the northwest. Foreign direct investment in the 1990s from Germany, Austria, and the Netherlands helped build the country's automotive industry and provided a strong base for the rest of the economy. This foreign investment is further reflected in the fact that upwards of 38% of entire sectors of the Czech economy are owned by foreign-owned corporations. The large stake of foreign ownership has created concerns over dependency on foreign entities and has left the Czech economy prone to shocks in foreign demand or global supply disruptions. This openness has supported growth but also increased vulnerability.
The country boasts a flourishing consumer production sector and has privatized most state-owned heavy industries through the voucher privatization system. Under the system, every citizen was given the opportunity to buy, for a moderate price, a book of vouchers that represents potential shares in any state-owned company. The voucher holders could then invest their vouchers, increasing the capital base of the chosen company, and creating a nation of citizen share-holders. This is in contrast to Russian privatization, which consisted of sales of communal assets to private companies rather than share-transfer to citizens. The effect of this policy has been dramatic. Under communism, state ownership of businesses was estimated to be 97%. Privatization through restitution of real estate to the former owners was largely completed in 1992. By 1998, more than 80% of enterprises were in private hands. Now completed, the program has made Czechs, who own shares of each of the Czech companies, one of the highest per-capita share owners in the world. On the other hand, by the public is the voucher privatisation seen mostly as unfair and source of corruption.
1995–2000
The country's economic transformation was far from complete. Political and financial crises in 1997 shattered the Czech Republic's image as one of the most stable and prosperous of post-Communist states. Delays in enterprise restructuring and failure to develop a well-functioning capital market played major roles in Czech economic troubles, which culminated in a currency crisis in May. The formerly pegged currency was forced into a floating system as investors sold their Korunas faster than the government could buy them. This followed a worldwide trend to divest from developing countries that year. Investors also worried the republic's economic transformation was far from complete. Another complicating factor was the current account deficit, which reached nearly 8% of GDP.
In response to the crisis, two austerity packages were introduced later in the spring (called vernacularly "The Packages"), which cut government spending by 2.5% of GDP. Growth dropped to 0.3% in 1997, −2.3% in 1998, and −0.5% in 1999. The government established a restructuring agency in 1999 and launched a revitalization program – to spur the sale of firms to foreign companies. Key priorities included accelerating legislative convergence with EU norms, restructuring enterprises, and privatising banks and utilities. The economy, fueled by increased export growth and investment, was expected to recover by 2000.
2000–2005 Growth in 2000–05 was supported by exports to the EU, primarily to Germany, and a strong recovery of foreign and domestic investment. Domestic demand is playing an ever more important role in underpinning growth as interest rates drop and the availability of credit cards and mortgages increases. Current account deficits of around 5% of GDP are beginning to decline as demand for Czech products in the European Union increases. Inflation is under control. Recent accession to the EU gives further impetus and direction to structural reform. In early 2004 the government passed increases in the Value Added Tax (VAT) and tightened eligibility for social benefits with the intention to bring the public finance gap down to 4% of GDP by 2006, but more difficult pension and healthcare reforms will have to wait until after the next elections. Privatization of the state-owned telecommunications firm Český Telecom took place in 2005. Intensified restructuring among large enterprises, improvements in the financial sector, and effective use of available EU funds should strengthen output growth.
2005–2010