A Country Divided That Can Stand

While the politicians are preparing to split Czechoslovakia in two, a Digital VAX computer in a dilapidated building near the Vltava River in Prague is quietly crunching millions of bids for shares in 1,478 state-owned companies. Ignoring the political rumblings, the country's massive privatization program is forging ahead. The first wave will put one-third of state industry in private hands by this fall. A second wave of 1,200 companies is being prepared for early 1993.

These massive selloffs are the heart of Czech Prime Minister Vaclav Klaus's plans for a bold, almost instant remake of the economy. The loss of Slovakia could actually prove a plus for the ground-breaking privatization scheme. Slovakia contains most of the country's basket-case armaments industry, and its leaders are loath to privatize quickly.

While political opposition and lack of capital have slowed privatization in Eastern Europe and the former Soviet Union, Klaus has a better shot at succeeding because he has won wide support for the plan. The key to his program, which could become a model for other countries, is a coupon scheme that will give up to 80% of the adult population a stake in former state enterprises. Vouchers that can be exchanged for shares in companies were sold at a bargain $37. Public interest mushroomed when newly created mutual funds promised to buy back these stakes for as much as 10 times the initial price.

To speed the creation of a private sector, the newly elected Czech government is accelerating the bold supply-side strategy that Klaus embarked on 18 months ago. Plans include cutting personal income taxes from a top rate of 97% to 47%, letting capital gains go untaxed, and stimulating small business. "The Czech republic is firmly in the hands of reformers," says Industry Minister Vladimir Dlouhy.

Despite the breakup threat and a lingering recession, the Czech economy appears to be poised for growth in 1993. Already, there are signs of vigor among sectors such as banking, machinery, construction, glass, and textiles. Komercni Banka, the country's largest with $9.3 billion in assets, has nearly doubled its work force, to 14,000, in the last year. "We are lending now ten times as much to small entrepreneurs as we were a year ago," says CEO Richard Salzmann.

A handful of companies sold to Western investors are leading the charge. After a dip in production in 1991, Volkswagen's joint venture with auto maker Skoda is operating at full capacity. It has muscled into new markets such as Germany with its $4,000 compacts. Skoda-VW aims to double production to 400,000 cars a year by 1996 and has begun designing a more sporty, upscale model. Glavunion, a joint venture between Belgian glassmaker Glaverbel and SKLO-Union, expects sales to jump 23% this year, to $160 million. With more aggressive managers in control, exports already have climbed from 40% to 65% of sales, with Germany the No. 1 market. "We always had high-quality products. What we lacked was good marketing," says managing director Stepan Popovic.

Small private businesses have multiplied rapidly, boosting the private sector from zero to 10% of gross national product in 18 months. Entrepreneur Ales Ordnung, 26, launched a wholesale clothing business last year that currently has sales of $2.2 million. He is planning a retail clothing chain modeled after The Gap and a restaurant-cafe-disco in Prague.

MORE COMING. The signs of a turnaround don't mean the transition will be painless. Policymakers expect a wave of bankruptcies and unemployment next year as private shareholders start to restructure, sell, or liquidate their companies. As a result, the Klaus government expects unemployment to double, to 10% or higher. And interest rates will remain high to keep inflation in check. Serious dislocation could create a backlash led by a vocal core of socialists. But no one is betting on a political about-face. In fact, a turnabout is more likely to occur in Slovakia, whose economy will probably go into a nosedive, ushering in a new group of pro-union politicians.

Meanwhile, an independent Czech republic looks to be a model for eastern Europe. Already, Prague boasts a booming retail and service sector. Consultants say as much as $3 billion to $4 billion more in foreign capital is waiting to be invested over the next two years. That could be just the glue Klaus needs to make his reforms stick.