Foreign Trade and Exchange Rate Development in the Czech and Slovak Republics since the Split

Introduction:

     The breakup of Czechoslovakia can be seen to have many different causes, but it seems to be the consensus that it came as a result more of political then economic developments in the country. On January 1993, the country went through the first part of its split, the country stopped existing as a single political union and became the Czech and Slovak Republics. Then on February 8 of 1993 the economic and monetary union collapsed. One argument, points to the different outlooks the sides had for their economic policies. Czechs saw socialism as decline or drop of their standard of living, while the Slovaks saw socialism as a period of increasing of economic conditions. As a result the Slovak Republic was resistant to change in economic policy, while the Czech Republic supported it. Much of the differences came from the social and demographic differences between the two as well as differences in the type of industries the regions specialized in and the respective governments supported.
     The two countries now separated have started practicing their own policies both politically and economically. The two countries still have much in common coming from the same historical background, region and have still continued many of the same economic policies. This paper will examine the differences and similarities in the short history of the two countries in reference to their foreign trade patterns and exchange rate regimes. It will examine the industries that each specializes in and the areas that have held them back from the economic position that they desire in the European Community. The desire for both counties to join the European Union (EU) came about at the beginning of the split and both have taken many steps in the direction of accession. The Czech Republic is slated to join the EU in 2004, while Slovakia is under consideration, with hopes of joining sometime after that. With these being common goals, it is important to take a look at the trade between these countries and the EU, it will show evidence of the growing role that union is playing in their economic growth.

Data Collection:
     The data used in this paper are taken from various organizations including The National Bank of Slovakia, Czech National Bank, the Bureau of Economic and Business Affairs U.S. Department of State, Hungarian Academy of Science, the Institute for Advanced Studies Vienna, as well as others. The problem that was faced most often was the lack of adequate data for comparison. There was plenty of information for analysis of one country, but the countries being relatively young lacked the statistical data that made it easy to compare with one another. Table 1 shows the exchange rate history of the Czech Crown (CZK) to the Slovak Crown (SKK) since the split. The data was available through the Czech National Bank for the period of November of 1995 to October of 2001. The data to complete the chart from January of 1993 to October 1995 was calculated from the numbers from the National Bank of Slovakia daily data on the SKK/USD, this giving the monthly average. This could then be compared to the CZK/USD monthly average data available though the Czech National Bank.

Trade:
     The economic foreign policy held by the Czech Republic is one of a generally open economy. Its major trading partners are Germany, Slovakia, Austria, Poland, Italy and France. Each of the major trading partners are from nearby areas, thus showing dependency on surrounding and relatively close countries. Being a Central and Eastern European candidate country for the EU, there is an emphasis on trade with the EU nations. This comes as a result of increasingly liberal trade policies and a reorientation of trade from the Soviet-bloc period. The growing dependence of the Czech Republic to conduct its foreign trade with the European Union shows the direction of the future for the country’s foreign trade. The exports to the EU went from being 38.4% of their total export in 1990 to 59.9% in 1997. The imports have had the same trend over the period going from 40.5% to 61.5%.
     In the Slovak Republic the economy has been moving with the same motivation and becoming a more open economy. It has been going through the process of privatization in some of the remaining government run industries. The leading trading partners are Germany, the Czech Republic, Russia, Italy and Austria. Slovakia’s trade are concentrated in surrounding areas, and trade partners outside of the region are generally due to products being imported, thus giving them a negative trade balance with these countries. The dependence of the Slovak republic with respect to the EU countries has followed the same pattern as the Czech republic. In 1993 the exports to the EU (15) was 29.5% and in 2000 reached 58.8%. The imports went from being only 33.1% to 51.4% over the same period.
     The major exports for the Czech Republic include machinery and transport equipment, other manufactured goods, chemicals, raw materials and fuel. The biggest industry increases in exports to the EU over the period of 1995-1999 were: motor vehicles, parts and accessories for motor vehicles, other general purpose machinery, electricity distribution and control apparatus, and machinery for production or use of mechanical power. Although the market share varies, as seen in the table labeled ‘Czech Republic: Gaining and losing industries in exports to the EU (15),’ the common trend is in the competitiveness gained in the market over the time period. The largest industry drops in exports to the EU over the period were: basic chemicals, other wearing apparel and accessories, basic iron and steel, ferrous-alloys, footwear, and agriculture and forestry machinery. These patterns may continue with the further integration into the EU with countries having the biggest competitive advantage dominating the common market. The industries where they have a large market share will have the largest effect either positive or negative depending on if the other EU nations continue to demand these products from the Czech Republic. The imports commodities as of 1999, as seen in the chart with the same heading, are machinery and transport equipment, other manufactured goods, chemicals, raw materials and fuels. The imports from the EU nations grew from 40.5% in 1990 to 61.5% in 1997. The overall trade balance with the EU has improved since 1996, the deficit in 1999 was 115 million ECU, which was about one third of the 1996 level.
     The exports of the Slovak Republic although similar has a different trade balance with the EU nations then the Czech Republic. The major exports for the Republic in 1999 are machinery and transport equipment, intermediate manufactured goods, miscellaneous manufactured goods, and chemicals. There percentage of the total imports can be seen in the table labeled ‘Slovak Republic Major Exports Commodities.’ The biggest industry increases in exports over the period of 1995-1999 were: motor vehicles, electrical equipment, parts and accessories for motor vehicles, office machinery and computers, and machinery for production or use of mechanical power. The market share for these Slovak industries as well as other can be seen in the table labeled, ‘Slovak Republic: Gaining and losing industries in exports to the EU (15)’. The competitiveness gained in these markets are many of the same ones gained in the Czech Republic over the time period, which is understandable because of their combined past. Much of the goods that Slovakia and the Czech Republic produce now, are the ones they produced as one country. As one country their economies were structured the same, the people were trained the same and thus would be good at producing the same products. This trend will most likely continue for some time, but there will also be a time where the two countries are competing for the same market share and thus in direct competition with one another and the trends will show increase in the share one country holds, while decreases in the share the other holds. These areas of increasing market share for Slovakia may be some of the industries that help the economy recover faster even though the market share they have in the EU is small, the country is helped, as all are, proportionately to how large the country is. The biggest decreases in competitiveness industry exports of the period of 1995-1999 were: basic iron and steel, ferrous-alloys, basic chemicals, pulp/paper and paperboard, furniture, and cement, lime and plaster. Again, the market share, which can be seen in the table labeled, ‘Slovak Republic: Gaining and losing industries in exports to the EU(15),’ gives important information of what products are demanded and as result produced in Slovakia. These goods could, in the future have further impact on Slovakia’s role in the EU and their success economically. The import commodities as of 1999, seen in the table with the same label, are machinery and transport equipment, intermediate manufactured goods, fuels, chemicals, miscellaneous manufactured goods. The imports from the EU have reached 51.4% in 1999 compared to the 33.1% level in 1991. This shows not only the dependence on the EU to buy the goods produced in Slovakia, but also the reliance the republic has on the EU countries for products it demands. The Slovak Republics manufacturing trade balance with the EU has improved over the last few years, as has the Czech Republic. It in fact has out preformed its economically more developed neighbor in this respect, showing a surplus in the manufactured goods it produces. The surplus reached 580 million ECU, the dominant area being the sale of transport equipment. The manufacturing industry in Slovakia shows the most branches with a trade surplus with the EU out of the Central and Eastern European candidate countries. Most of the candidate countries in fact have negative trade balances with the EU including the Czech Republic. Although this is true, the international competitiveness of the manufacturing industry in both republics improved during the period between 1995-1999 where as it has deteriorated in 6 out of 10 other Central and Eastern European Countries.

Exchange Rates:
     In the period of the totalitarian regime the domestic markets were almost completely isolated from economic impact of external markets; free foreign trade did not exist. There were three different exchange rates under this regime. An official exchange rate, for external use, a second for domestic business, the state businesses and its co-operatives, and a third for citizens. In 1990 there were the first preparatory steps taken in moving towards a market economic system. For the exchange rate, the national bank devaluated the crown to 24 Czechoslovak crowns (CSK) to 1 USD and it immediately changed to 28CSK/1USD, this in hopes of helping international trade. Development after 1991 marked a period of currency appreciation in real terms year after year. The cause of the real appreciation under the stable nominal exchange rate regime was due to the differences in inflation between the rate in the Czech Republic and that of the Western European countries. It made it harder for exporters to make a profit after the decline in the favorable economic conditions that were created after the devaluation in 1990 and the reduction in demand effected their biggest trade partners most. Any situation that made it harder to trade with Germany (43% of exports in1999) or any of the EU countries (59.9% of exports in 1997) would have adverse affect on the entire Czech economy. In the second quarter of 1997 the central bank of the Czech Republic was no longer able to face pressures on the Czech currency. They changed their foreign exchange rate regime from a stable nominal exchange rate to a floating one. This helped their trade conditions immediately and the new floating exchange rate would move depending on the market conditions and give a better picture of how the economy was doing.
     The Slovak crown has faced much of the same challenges at being stable as the Czech currency. It clearly followed the same policies when the currency was the CSK and since 1993 until October 1998 the National Bank of Slovakia (NBS) was fixing the currency. The Slovak crown from July 1994 until October 1998 was pegged on a basket of two currencies, 60% consisted of the DEM and 40% USD. The difference between the resulting rate and its theoretical value, calculated according to that currency basket was not to exceed 7%. In April of 1996 the NBS stopped publishing multiple exchange rates as under the totalitarian regime of the past. In October of 1998 the fluctuation band and currency basket of the SKK was abolished. The exchange of the SKK is now determined by demand and supply on the interbank FX market only. On January 1, 1999 the Euro was established as an anchor currency, this as a part of one of the many steps in accession into the EU. Graph 1 shows the SKK and its relation to the CZK from the time of the split until the present (percentage scale; 100 represents the 1-to-1 value at the time of the currency split.) The clear jumps in the graph indicate first the adjustment of the two new nations being on their own (devaluation of SKK by 10%.) Then there is a long period where the graph has little movement and this represents the time when the countries both held fixed exchange rate regimes and would not let the currency shift with the market, especially to one another a top foreign trade partner helping trade conditions. The next big jump is in January 1997 when the Czech National Bank allowed the CZK to float, thus depreciating in value relative to the fixed SKK. The next shift in the graph was when NBS stopped fixing the SKK and let it float in late 1998.

Conclusion:
     The similarities that were seen in the common products traded as well as the policies that the two republics hold are understandable given there pasts as stated in the paper. The continued pursuit of EU accession will only increase the trade dependency on countries within the union. The reorientation from the east to the west will continue as long as the countries are to join. The common exchange rate policies will also be further alike. If both countries do join the EU the exchange rates will have to converge even further and if they choose and are allowed to join the group of EU countries with the common currency, the Euro, they will eventually be the same currency, again. The two countries will continue to make decisions that help their own economic positions and keep their economy stable. This may include continuing some of the same practices as one another as in the past or following completely different policies, which is unlikely with the countries coming from the same past and, as of now, moving toward the same goal of accession into the EU. In fact with the Czech Republic slated to be part of the EU in coming years the trade Slovakia has with the EU will increase significantly because of its strong trade relations it still holds with other half of former Czechoslovakia. The republics will continue to be sovereign nations and will have many of the same policies both economically as well as politically because of their apparent accession into the EU which holds standards in both areas.

Bibliography

National Bank of Slovakia, Monthly Review of Foreign Exchange Rates of the NBS. 1993-1995.

Bureau of Economic and Business Affairs U.S. Department of State 2000 Country Reports on Economic Policy and Trade Practices, Czech Republic. March 2001

Czech National Bank, Central Bank exchange Rates Fixing – Monthly Averages Currency: SKK.

International Monetary Fund, Slovak Republic, Selected Issues and Statistical Appendix. July 2001

Nicholas Tsounis, Accession to the EU, Tariff Protection and Trade: The Case of Bulgaria, Hungry and the Czech Republic. 1998

Eva Ehrlich, Gabor Revesz, The State of the Economy in Central and Eastern Europe Compared with the EU’s Requirements. Institute for World Economics, Hungarian Academy of Science, Working Papers No. 102, August 1999

Jan Fidrmuc, Julius Horvath, Jarko Fidrmuc, Stability of Monetary Unions: Lessons From The Break-Up of Czechoslovakia. Institute for Advanced Studies Vienna, Transition Economies Series No.10, July 1999

Peter Havlik Michael Landesmann and Robert Stehrev, Competitiveness of CEE Industries: Evidence From Foreign Trade Specialization and Quality Indicators. The Vienna Institute for International Economic Studies, Research Reports. No. 278. July 2001

Report on the Slovak Republic’s Progress in its Integration into the European Union September 2000- June 2001, June 2001

Yahoo! Finance, International Finance Center Country Fact Sheet: Czech Republic & Slovakia.


Table 1.
Czech Republic: Gaining and losing industries in exports to the EU (15), 1995-1999

Table 2.
Czech Republic Major Export Commodities

Table 3.
Czech versus Slovak Koruna Exchange Rate

Chart
Rate History CZK/SKK