Czech Republic Strives To Keep 'Velvet Recovery'

EAST Europeans must wonder if the Czechs are ever going to run out of velvet. They've made the historic transition from a centrally planned police state to a stable, free-market democracy look remarkably easy.

First there was the Velvet Revolution against communism, then a Velvet Divorce from Slovakia, and now Vaclav Klaus, prime minister of the Czech Republic, is announcing the completion of what is already being called the ''Velvet Recovery.''

The latest economic statistics are impressive: low inflation, little foreign debt, a balanced budget, a capital accounts surplus, and a solid 2.6 percent growth in national output last year.

''The Czech Republic has emerged as the front-runner in the region in terms of political stability and economic growth,'' says Jiri Pehe, director of research and analysis at the Open Media Research Institute, in Prague. ''The approach has been careful and pragmatic, and so far it's been quite effective.''

But there may be some rocky times ahead. The Czechs engineered their relatively painless recovery partly by keeping wages low in state-controlled enterprises, influencing wages in the private sector as well. These low wages attracted investors and helped avoid the mass layoffs that have dogged Hungary and Poland.

With only 3 percent of the work force jobless, support for the government remains strong -- in contrast with recent elections in Slovakia, Hungary, Poland, and Bulgaria, where former Communists were returned to power.

There are disadvantages to the low-wage policy. About 80 percent of the country's state-owned companies have been nominally privatized by giving citizens vouchers to purchase company shares.

''But there's a big difference here between 'privatized' and 'private,''' says Frantisek Turnovec, director of the Charles University Center for Economic Research in Prague. ''A strange economic situation has emerged where the companies are privatized, but still have no real owner. With wages low, there's been little incentive to restructure and invest in modernization.''

The complex privatization program also resulted in the big Czech banks acquiring effective control of many newly privatized companies -- some in debt to the very same banks. The banks may avoid radical restructuring or liquidation of indebted companies for fear that they will not be able to collect on their loans.

With little incentive to restructure, the manufacturing and industrial sectors are running into trouble. In open competition with Western firms, Czech companies are exporting less, resulting in a widening trade deficit.

Using various exchange controls, the government has averted a crisis by keeping the national currency undervalued by an estimated 40 percent. This makes Czech products and services cheaper for foreign buyers.

But earlier this month, Prime Minister Klaus announced that the Czech crown would be made fully convertible by year-end.

''Full convertability will bring a whole set of problems with it,'' Mr. Turnovec says. ''Hundreds of exporters will be driven into bankruptcy by the revaluation of the crown.''

Turnovec also estimates that about 30 percent of Czech companies are already technically bankrupt, and many will be forced to close when the nation's wage- and exchange-rate regimes are liberalized. The result could be increased layoffs and an erosion of political support for the reform process prior to next spring's parliamentary elections.

Nonetheless, it seems likely that the Czechs will weather this impending storm. The country does have a booming tourism and service industry, a healthy social-welfare system, and a growing middle class.

''It's probably been a conscious choice to delay the full impact of enterprise restructuring in the hopes that the private sector will have a chance to grow enough to be able to absorb some of the work force that will be laid off,'' says Stephen Heintz of the Institute for EastWest Studies in Prague. ''To some extent that has happened, but it's yet to be seen if it will be sufficient to avoid major social dislocations.''

The country suffers from political centralization and poorly developed civic institutions. The political landscape has been overshadowed by an increasingly bitter dispute between Klaus and President Vaclav Havel over the course of democratic reform.

''They have democracy at a macro-level, but there's a lack of decentralization of political power,'' Mr. Heinz says. ''But in this country, which was a democratic country with a long history of democracy, its not such an alarming situation as it might be elsewhere in the region.''

Former Czechoslovakia had one of the most advanced economies in Europe before the Communist takeover.