On January 1, 1991, Czechoslovakia introduced a comprehensive reform program, including the liberalization of domestic prices and of external trade, and a mass privatization program. The collapse of the Soviet economy and the terms of trade deterioration that followed from the dismantling of the Council for Mutual Economic Assistance (CMEA) trading system worsened the prospect for inflation and the balance of payments at the critical, initial phase of reform. To minimize the risk of financial instability, the structural policies were supported by mutually reinforcing macroeconomic policies comprising a pegged exchange rate regime and restrictive fiscal, monetary, and wage policies.
The reform program has been remarkably successful in quickly stabilizing prices and achieving a viable balance of payments position. Moreover, considerable progress has been made in initiating structural reform measures, most notably privatization and tax reform, although it will take some time before these reforms are fully implemented. At the same time, output has been declining sharply. In part, this decline is the consequence of structural changes: many productive sectors have become noncompetitive under the emerging market framework, while those sectors that do enjoy comparative advantages have yet to be expanded. The eventual takeoff of investment and growth is predicated on completing structural reforms, such as developing financial markets and safeguarding their stability, privatizing large enterprises, minimizing government interference with economic signals, and imposing the “hard” budget constraint.