The Czech transition: The importance of microeconomic fundamentals

We examine the case of the Czech Republic, which has been frequently cited as one of the most successful cases of transition economies in Central and Eastern Europe (CEE). Despite the costs related to the break-up of Czechoslovakia in late 1992 and 1993, the immediate consequences were quickly absorbed and the country implemented the most important market-oriented reforms relatively successfully and faster than most other CEE countries. We first identify the initial conditions in the Czech Republic in 1989 and the development strategy adopted at the beginning of the transition. We then address the importance of international factors, including the role of trade opening, foreign direct investment, and external borrowing. We analyse the achievements and failures of the strategy with respect to both economic performance and progress with institutional reforms, as well as the reasons behind the resulting outcomes. This leads us to outline future challenges, including unfinished areas of reform. We conclude with lessons for other developing countries.