Hills Ahead for Czech Engine That Could

SINCE communism's collapse in 1989, the Czech Republic has made a habit of bucking the trend in Central Europe. While high inflation, unemployment, and security concerns still unsettle its neighbors, the Czech Republic features a largely privatized economy and a reliable currency that is attractive to foreign investors and tourists alike.

But thunderheads are building that could rain on the Czech economic miracle. The next five years could well be more difficult for reform than were the first five years after the communist leadership was ousted in the former Czechoslovakia in 1989.

''The mess over social policy is just beginning,'' says Steve Kettle, an analyst at Open Media Research Institute, a Prague-based think tank funded by American financier George Soros.

''The transformation of the economy [from communism to capitalism] has been officially completed,'' he adds. ''Now they're trying to tackle the social side - health care, pensions, and education.''

Continued success in reform will depend largely on the outcome of 1996 parliamentary elections, some Czech politicians say. The campaign is already beginning. And for all its achievements, the governing coalition, headed by Prime Minister Vaclav Klaus, is showing stress.

Mr. Klaus' Civic Democratic Party, which dominates the coalition, is in relatively sound shape. But the smaller coalition members, which provide the government with its majority in parliament, are struggling. The popularity of the most influential junior coalition member, the Civic Democratic Alliance (known as ODA), has plummeted after a banking scandal.

The key question for the government is whether the ODA will earn enough votes in the next election to stay in parliament. The ODA would have to escape from Klaus's shadow in order to raise its profile among voters. That could lead to clashes over social policy, where the ODA favors a gentler approach than does Klaus, whose economic philosophy is similar to that of the chief pooh-bahs of deregulation - Margaret Thatcher and Ronald Reagan.

If the ODA fades, the government could be left without a stable parliamentary majority. As it already stands, the government faces stiff resistance from the opposition Social Democrats to reorganizing the Czech Republic's social system.

''If the Social Democrats gain influence, it will make the task of reforming much more difficult. Everything is not decided yet,'' said Ondrey Turek, secretary-general of the Christian Democratic Party, a member of the ruling coalition.

But one thing is sure for the 1996 election: Former communists are not about to make a comeback in the Czech Republic, as they have in Lithuania, Hungary, Poland, and Bulgaria.

First, the Social Democratic Party, which has roots extending back to the interwar republic of Czechoslovakia, provides a viable left-wing alternative to the Communists.

Second, the success of the Klaus government's reforms keeps the Communists from making inroads. ''Here people can see the results,'' says Mr. Turek. ''Mr. Klaus perhaps more than anyone else in Central Europe realized the key to success was making economic reforms.''

The unemployment rate is among the lowest in Europe at about 3 percent. Gross domestic product rose 2.6 percent in 1994. Inflation is relatively low by Central European standards at 10 percent. But keeping the Czech Republic fiscally fit could pose a challenge, experts say.

One main task will be breaking up industrial monopolies. That could increase unemployment as the government is trying to trim welfare, which now carries all the baggage from the communist era, including programs the government can no longer afford.

Another challenge is the foreign trade deficit, which last year was $436 million - down from a $343 million surplus in 1993. The trade deficit is more than offset by the $2.4 billion in revenue from tourism. But the deficit could indicate industrial weakness that might erode the country's international competitiveness.