Nestled in between Austria, Poland, Slovakia, and mighty Germany is the thriving center of Emerging Eastern Europe. With a low-cost and skilled labor force and close proximity to Western Europe, the Czech Republic is standing on the cusp of a promising future. Today, the country is a bustling industrialized powerhouse and a magnet for tourism. Smaller than Scotland or South Carolina, the country is home to fairytale castles, some of the world’s best spas, quaint medieval towns, and a bounty of natural beauty that stretches across the ancient lands of Bohemia and Moravia.

As a nation, the Czech Republic has witnessed constant invasions, merciless conquests, and unsurpassed unions and divisions. Its national anthem is a poignant reminder of its turbulent past:

Kde domov můj, kde domov můj? (Where is my home, where is my home?)

History

Of velvet revolutions and velvet divorces

The region that today is known as the Czech Republic was occupied by Celtic and Germanic tribes before the arrival of the Slavs in the fifth and sixth centuries. Conquered by a Mongolian army called the Avars, the Slavs were liberated by a Frank who established the Samo Empire in the mid-seventh century. The short-lived Great Moravian Empire followed soon after, enveloping the regions of western Slovakia, Silesia, Bohemia as well as parts of Germany, Poland and Hungary. By the end of the ninth century, the Czechs seceded to form their own independent state of Bohemia under the Premyslids – a dynasty of the legendary Ceši or the Cechove tribe. Incidentally, the Czechs derive their name from this tribe.

The Premyslids held power for more than 400 years, before the German King Otto I conquered Bohemia, incorporating it into the Holy Roman Empire.

In 1526, the Czech kingdom came under the rule of the Austrian Habsburg, leading to a century of conflict between the Czech nobility and the Habsburg monarchy. The clash culminated in the decisive Battle of the White Mountain in 1620 – the Bohemian army was sublimated, and the next 300 years saw the country under the yoke of Austrian Imperialism. Czech nationalism rose toward the end of the 18th century, ultimately resulting in the creation of the first independent state of Czechoslovakia on October 28, 1918 at the end of World War I.

Functioning as a democratic republic, Czechs and Slovaks were pulled together for the first time in history. But, the humiliating Munich Pact republic of 1938 ceded vast border areas of Czechoslovakia to Hitler, including the German-speaking region of Sudetenland. Slovakia declared independence as a satellite state of Germany under Josef Tiso in 1939. Eventually, World War II saw the entire country under the siege of Nazi occupation. The Prague Uprising of 1945 and the arrival of the Soviet Red Army on May 9, 1945 led to the liberation and formation of independent Czechoslovakia. Following the 1946 election, the Communist Party garnered the single largest share of 38%, and shared work with the Czech National Front.

In 1948, the Communist Party seized complete power, marking the beginning of the communist totalitarian regime. As the country lurched through a period of severe and harsh repression in the 1950s, respite came through a non-violent demonstration that sparked the “velvet revolution.” On November 17, 1989, a week after the fall of the Berlin Wall, the Communist government tried to harshly suppress a student demonstration. Public anger grew and the velvet revolution rang the curtains down on communism with Václav Havel becoming the country’s first democratically elected president.

Czechoslovakia’s tumultuous past rang the last footnote in 1993 when the “velvet divorce” ensued, the peaceful split of two independent countries – Slovakia and the Czech Republic.

At present, the Czech Republic is a multi-party parliamentary representative democracy with the prime minister as the head of government and a president who holds largely ceremonial powers. President Vaclav Klaus was reelected for a second term in February 2008 while Prime Minister Mirek Topolanek heads a three-party, center right coalition that was voted into governance in January 2007.

Culture

Synthesis of folk tradition

With cities such as Prague, Brno, Telč, Český Krumlov and Karlovy Vary, the Czech Republic is a beautiful synthesis of the cultural and historical traditions that symbolize Europe. Perhaps among the most outstanding examples of Gothic, Baroque, Renaissance, and Cubist buildings in Europe can be found in this landlocked country. One of the most resplendent countries on the European continent, the Czech Republic is draped with spectacular mountains, meadows and green forests.

Czech cuisine combines hearty, good food, with the world’s first golden beer, the Pilsner, which was brewed first in Plzeň in the Czech Republic. Culturally vibrant and diverse, Czech art has matured like fine wine over the ages with writers Franz Kafka, Rainer Maria Rilke, and Milan Kundera, and singer Magdalena Kožená all born in the Czech Republic. Bedřich Smetana was one of the greatest Czech composers, who along with Antonín Dvořák and Leoš Janáček were responsible for creating a national Czech musical identity, which fused folk traditions, songs and dances in a mesmerizing blend.

Puppetry, puppetry making, and marionettes have been part of Czech history and tradition since the 18th century, growing into a revered art form. These puppets were traditionally carved from wood or made from plaster. Josef Skupa and his famous puppet characters “Spejbl and Hurvinek” were notable proponents of the art during the early 20^th century.

Almost 95% of the 10.2 million people who inhabit the Czech Republic are ethnically and linguistically Czech, with a small minority of Germans, Roma, Slovaks and Poles.

Economy

Economic miracle of Europe

Since its independence, the Czech Republic was thrown into a net of communist control. The communists created a rigidly centralized economic system where virtually all areas of public and economic management were under the control of the government. Despite maintaining a high standard of living, at least in comparison with other Eastern European nations, the Czech economy deteriorated under such strict controls. It was not until the Velvet Revolution of 1989, that the economy was liberated and reorganized as a free enterprise. At the time of the ‘divorce’ from Slovakia in 1993, the Czech Republic enjoyed the status of being the more economically privileged of the two. The Czech economy was relatively more stable and diversified, as Slovakia had been made a major producer of arms for the communist countries in Eastern Europe, a scenario that suffocated growth in other sectors.

With a low-cost and skilled labor force, proximity to Western Europe, and a low level of foreign debt, the country was able to fast track reforms, and advance its economy at a quicker pace. Large parts of the economy were privatized through a voucher system, with Czech citizens able to purchase shares in previously state-owned enterprises. Spectacular growth followed, and the “Czech miracle” reached its peak in 1995 when several structural reforms led to the private sector contributing 74% of the GDP, the highest in the region.

However, in the late 1990s, the country suffered a devastating recession, leading to a marked decline in GDP, a rising foreign-trade deficit and growing unemployment. Yet, despite this blip on the radar screen, by the beginning of the 21st century, the economy was back on track, achieving one of the highest growth rates in the EU region.

The leading petrochemical producer in the Czech Republic, which was acquired by one of Central Europe’s largest oil refiner in 2005 is going through a restructuring period currently. It owns 3 refineries with a total annual capacity of 5.5 million tonnes and an integrated petrochemical plant as well.

Although approximately 39% of land in the Czech Republic is cultivated, the sector contributes to just 3% of the GDP. Main crops include wheat, corn, rye, barley, potatoes, flax and hops. Around 58% of the GDP comes from services, such as telecommunications, tourism support, banking, and accommodation, which have expanded rapidly in recent years. Since 2002, tourism in particular has been on the rise. The country’s architecturally diverse cities, and unspoiled lakes and mountains attracted more than six million tourists in 2007, a 3.8% jump compared to the previous year. Tourism is responsible for 105,000 direct and indirect jobs, representing 2.2% of total employment in the Czech Republic. The retail industry continues to be one of the strongest in the country with foreign chains growing to dominate almost 60% of supermarket retail turnover. The telecommunications sector is robust, but Internet penetration is still low and well below the EU average, despite the fact that 24% of Czech households possess a computer.

During the long decades of occupation by foreign forces, especially between 1918 and 1939, Czechoslovakia was primarily a light industrial producer with goods such as textiles, glass and porcelain. Under communist rule, however, the focus shifted to heavy industry such as metallurgy with the manufacture of steel, machinery and weapons, mainly in Slovakia. Today, industry contributes to 39% of the GDP and the automotive industry plays a crucial role in the Czech economy, even as traditional branches such as the glass industry are being revived. In addition, rubber and plastic production have made great progress in the country in recent years. The petrochemical industry has some of the largest plants in the Czech Republic with oil refineries located in Litvínov and Kralupy nad Vltavou. Inorganic chemical production is situated in Lovosice, one of the centers for the production of fertilizers and artificial silk. Steel production is concentrated in the Ostrava area in Moravia.

With limited energy resources, the Czech Republic is forced to import most of its energy needs. Nuclear power accounts for 15% of the country’s energy supply while renewable energy sources (RES) provide approximately 3% of the power. The Czech Republic has set a target of 15% to 16% of RES in total energy consumption by 2030, and currently it ranks sixth highest among the EU countries in terms of biodiesel production capacity.

Today, the Czech economy is considered 68.5% free from the rigid control of communism, ranking 37th on the Index of Economic Freedom (2008). The country is also classified as a high-income country with a gross national income per capita of $14,450, and in January 2008, the Topolanek government introduced a single 15% personal flat income tax rate. Annual life expectancy at birth is estimated at 75.9 years, with female and male life expectancy at 79.1 years and 72.7 years respectively.

The Czech Republic is a member of the North Atlantic Treaty Organization (NATO), and joined the EU in 2004. It is also a member of the International Monetary Fund (IMF), and other international organizations such as the Organization for Economic Cooperation (OECD), the European Bank for Reconstruction and Development (EBRD) and the Central European Free Trade Agreement. Although a member of the EU, the Czech koruna (crown) continues to be in circulation, with the Czech Republic not adopting the euro at least until 2012. With annual GDP growth of 6.8% in 2006 and 6% in 2007, the Czech Republic is well poised to take on the mantle of being one of Europe’s ascending players. The economy is driven mainly by very strong net exports, coming largely on the back of foreign direct investment in the automotive sector.

Rising European star has hurdles to overcome

Home to more than 1.2 million people, Prague, with a per capita GDP of $33,784, is among the richest cities in the European Union. The city also generates nearly 20% of the national GDP, and is the prime epicenter of Czech tourism.

The Czech Republic is distinguished as one of the most stable and prosperous economies among the post-communist states in Europe. Foreign direct investment (FDI) is among the highest in the region, with a strong balance of payments contributing to a resilient fiscal outlook. In 2005, the Czech Republic attracted record FDI, and gross inflows touched over 9% of GDP. According to the OECD, the Czech economy boasts of a high level of ‘involvement in international production chains’ in an increasingly globalized world. Globalization is also influencing the way the economy functions, as multinational companies now command an important role in the retail industry, and with increased international mobility of labor.

A favorable location coupled with low labor costs make this economy attractive for multinationals the world over. Strong exports supported by robust FDI inflows in the automotive sector have been instrumental as growth drivers in the economy. However, GDP growth is estimated to be around 4.4% in 2008, with the global financial crisis, and the economic slowdown worldwide taking its toll.

Inflation, which had been as low as 1.5% in 2006, escalated to 5.5% in 2007 and is expected to clock over 6% in 2008. This marked rise in inflation has been the result of international market developments, and global factors such as climbing oil prices. A potential problem could be that the Czech Republic continues to be heavily reliant on trade with the EU; over 85% of its exports and just under 70% of its imports are conducted with its EU neighbors. A pronounced slowdown in the Euro-zone as well as the EU economy is likely to hamper exports from the Czech Republic. Germany is a significant trade partner, especially an important destination for automobile sector exports from the country. Moreover, with the financial crisis spreading from Developed Europe to Emerging Eastern Europe, the economic resilience of this emergent economy is likely to be put to the test. Restricting deficits on the fiscal as well as the external front have been seen as key challenges for the Czech economy. Though the current account deficit has been brought down from 3.3% of GDP in 2006 to about 2.8% in 2007, slowing exports may pose a threat to further easing of the deficit. However, on a positive note, the government deficit has been brought down from a high of 6.8% of GDP in 2002 to 1% in 2007.

The paneláks are set to undergo a major transformation, supported by EU funding together with the Czech government, which pumps in around $36 million annually through three renovation programs. By 2015, places like the Roma ghettos would be changed forever.

Encouragingly, the Czech Republic appears to be more resilient than its counterparts in Eastern Europe in weathering the financial turmoil. Its currency, the koruna, was relatively less volatile than the Hungarian forint, which witnessed a massive depreciation in October 2008, as nervous investors led a capital flight from the economy.

Tourism has been one of the main drivers of the economy, though the country’s high GDP growth has been propelled primarily by domestic demand. The unemployment rate, boosted by an upswing in economic activity, fell to less than 8% in 2005. Yet, the Czech government needs to reform the labor market as long-term unemployment problems persist. Not unlike the rest of Europe, ensuring a consistent labor supply will remain a challenge. Especially, since according to the World Bank estimates, medium-term spending pressures are likely to rise due to the Czech government’s more than generous social entitlements, provisions for healthcare and a radical pay-as-you-go pension scheme.

Slowing the pace of economic reforms is the political gridlock that has gripped the country since 2006, with no party winning a comfortable majority. Nevertheless, for the most part, the Czech Republic is still considered one of the greatest economic successes in the European region, and most Czechs enjoy a standard of living higher than other former communist countries in Europe.

Indelible heritage of communism

To understand the future of the Czech Republic, one needs to visit its past. Prague’s ornate, elegant architecture hides its darker underbelly – the infamous paneláks that seam through the edges of the city. Paneláks were shabby huge housing estates, dull, drab, and dreary, which were built during the Communist era to symbolize the ideology of material equality through affordable housing for all. These monolithic facades house nearly a third of the Czech population. During the 1950s and 1960s, in a stagnant economy where demand for housing exceeded the supply, these mediocre, featureless buildings cast a grey pallor over Prague and the Petrzalka, now in Slovakia. With the fall of communism, these aging buildings are undergoing a transformation. The monotony of grey is being replaced by vibrant splashes of art, and supermarkets jostling side-by-side with huge, glitzy malls. The Czech government is pumping in more than $135 million towards refurbishing these concrete labyrinths. As communism’s social engineering experiment fades into the dark and democracy comes alive in the Czech Republic, the paneláks stand still and Golden Prague with its Baroque architecture and splendid castles comes into focus. Change is blooming. Like the paneláks, the Czech Republic is no longer tethered to its past, and the country is young, free, and marching ahead.

A Postcard from the Czech Republic

Nestled in between Austria, Poland,
Slovakia, and mighty Germany is the
thriving center of emerging Eastern Europe. Read more