Pave1 Mertlik
Charles University, Prague, Czech Republic
10.1 Features of the Czechoslovakian Recession in 1991-1992
After embarking on the process of transition to a market economy on 1 January 1991, the macroeconomic development of the Czechoslovakian economy was characterized by a deep two-digit recession. Real GDP decreased by 15.9% during 1991 compared with the 1990 while the real net material product decreased in the same period by 19.2%.[1] The level of officially registered unemployment also increased rapidly.[2] Although the recession continued in 1992, the decline was no longer so rapid and some signs of macroeconomic stabilization or even slight revival in the economy were observed. Unfortunately, these signs represented only a temporary break before a new decrease of both Czech and Slovak economies in 1993. In 1992, real GDP decreased by about 8.7% (compared with the previous year).[3] For basic data concerning the development of Czechoslovakian output and unemployment in the years 1990 to 1992 see Tables 10.1 and 10.3 in the Appendix. [4]
Regarding to the individual components of aggregate demand in 1991, real investment, real personal consumption and real exports decreased substantially, as well as real incomes and real retail sales. However, despite the extensive contraction of aggregate demand in real terms, it definitely cannot be considered
182 P. Mertlik as the sole cause of the Czechoslovakian recession. The nominal indicators for 1991 present a very different picture: increases in every case. The annual rate of inflation (the annual increase of the level of the consumer prices at the end of the year) was 53.6% (see Table 10.2 in the Appendix). Thus, a good portion of the causes for the contemporary recession must be on the supply side of the economy, and due to the present contraction of the aggregate supply we should rather speak about a slumpflation or a stagflation in Czechoslovakia than about recession in the traditional sense (i.e., a product slump caused by a decrease of aggregate demand; for a detailed discussion of this issue see section 10.3.1 and Mertlfk (1993). The nature of the recessional development in Czechoslovakia throughout 1992 reflected the most important features from the preceding year.
The purpose of this paper is to present several explanations for the economic decline in former Czechoslovakia. In addition to conventional macroeconomic explanations, we focus on alternative microeconomic-based factors.
10.2 The Conventional Explanations of the Causes of the Czechoslovakian Recession
The sources of the Czechoslovakian recession during 1991 and 1992 have been widely discussed. The conventional domestic interpretations of these phenomena describe the recession as a result of the dramatic restrictive policies of the government, of the collapse of the former COMECON market, the sales crisis on Western markets (as a result of the contemporary world recession),[5] and the necessary adaptive restructuring of the supply side of the Czechoslovakian economy to meet the preferences of the buyers after the liberalization of foreign trade and the hardening of budget constraints. All these explanations are at least to some extent correct; of course, some more than others. All in all, though, these reasons still do not seem sufficient in the quantitative sense: could the combination of these phenomena indeed be the cause of such a deep and rapid recession, particularly as illustrated in some indicators not previously used in recent Czechoslovakian history?[6]
The role of the government's restrictive macroeconomic policies in the decrease of Czechoslovakian output seems limited since the analysis of the monetary policy in 1991 does not account for this factor as restrictive. However, this should not necessarily imply that such policy should mechanically cause an expansion of the aggregate demand.
Product Slump in Czechoslovakia 10.2.1 Fiscal Policy
Considering fiscal policy objectives, the budget surplus planned by the government for 1991 was not reached. Instead, the result was a budget deficit of 10.4 billion Czechoslovakian koruna (CSK), which represents 2.0% of nominal public expenditure and 1 .l% of nominal GDP. But nominal public expenditure increased by only 12.0% in 1991 in comparison with the previous year, which means that the ratio of nominal public expenditure to nominal GDP decreased from 56.2%
in 1990 to 52.2% in 1991 (see Table 10.1 in the Appendix). Simultaneously a slight decrease of the level of taxation (differentiated decrease of both corporate profit tax rates and turnover tax rates) was realized.[7]
If one accepts a simplified assumption that the potential real GDP was constant during such a short one year period, then one must also assume an increase of the potential nominal GDP by about 50% to 55% due to the growth of the rate of inflation. These assumptions allow us to conclude that the cyclically adjusted deficit built-in into the construction of the 1991 budget was lower than in the previous year. Therefore, the budget was constructed as a restrictive one in real terms since the increase of nominal public expenditure by 12.0% is significantly lower than the assumed increase of the potential nominal GDP (and it actually represents a decrease of real public expenditure by 21.8%).
A slightly different picture of the fiscal policy for 1991 may be obtained if the sector of state-owned enterprises (SOEs) is included in the public sector and their budgets into the system of public budgets. According to rough estimates of the Czechoslovakian State Bank (SBCS) and Czechoslovakian academia, the insolvency of SOEs reached about 150 to 180 billion CSK at the end of 1991 (and about 200 billion CSK by June 1992, (see Sulc, 1992)), which represents an increase of approximately 100 to 150 billion CSK since its initial level of about 30 to 50 billion CSK at the end of December 1990. This constitutes an increase of about 100% to 500% during 1991 (or by about 150 to 170 billion CSK, i.e., 300% to 566.7% until mid-1992).[8] As SOEs still represent a part of the public sector, the increase of the insolvency of SOEs may well be interpreted as a hidden deficit of the system of public budgets. If this was accepted, then the officially stated budget deficit of 10.4 billion CSK is a considerable understatement, and the formerly presented conclusion about the restrictive character of the 1991 budget should be made on a different quantitative level. The 1991 nominal public expenditures including these hidden 100 to 150 billion CSK would rise to a level exceeding the 1990 nominal public expenditures (including hidden expenditures of 30 to 50 billion CSK on the same principle) by between 20% and 35%: that means, by 20 to 35 percentage points less than is the assumed 1991 50% to 55%
increase of the potential nominal GDP.
The monetary effect of the phenomena of insolvency and subsequent mutual indebtedness of enterprises is also important. These processes undoubtedly represent a hidden money issue that is completely beyond the control of the Central Bank.
Thus, the phenomena of insolvency and mutual indebtedness of Czechoslovakian enterprises form a specific connecting link between the fiscal and monetary spheres of the economy.
10.2.2 Monetary Policy
The government's effort to provide a restrictive monetary policy during 1991 was definitely unsuccessful in terms of the quantitative theory of money. According to the
SBCS,
the M2 aggregate increased by about 25.2% during 1991.[9] This, no doubt, would imply a monetary expansion. If we put the relative changes of P and Q as:and
(refer to Tables 10.1 and 10.2 in the Appendix for data on annual inflation and real GDP), and the relative change of M as:
into a slightly modified Fisher equation, such as:
we obtain