The Czech lands have been traditionally among the most economically developed regions of Europe. When the Communists came to power in Czechoslovakia in 1948, they created a highly centralized economic system. Nearly all aspects of economic planning and management came under the control of the central government. Virtually all of the country’s economic assets were placed in state hands; economic managers and decision-makers were cut off from their counterparts in the West; and foreign trade was conducted almost exclusively with other Communist countries. Although the economy remained strong by Eastern European standards, with one of the highest standards of living in the Communist world, the policies adopted by the Communist government led to long-term economic decline in Czechoslovakia. After the collapse of Communism in 1989, the new leaders of Czechoslovakia had to deal with this legacy.

In many respects, the partition of Czechoslovakia in 1993 represented for the emergent Czech Republic an economizing measure far more effective than any that domestic government policy could hope to accomplish. While the Czech Republic and Slovakia officially shared the status of successors to the federal state, long-standing inequities in economic development gave the Czechs a decided advantage at independence. Rigid compartmentalization under the Czechoslovak planned economy made Slovakia, with its mineral resources and hydroelectric potential, a major producer of armaments for the former communist nations of eastern Europe. The economy of the Czech Republic, on the other hand, was relatively diversified and stable, reflecting both a more amenable geography and the historic predominance of Czechs in the federal administration. Similarly, the transition to a market economy initiated after the so-called Velvet Revolution of 1989 lagged behind in Slovakia. Irrespective of deeper societal factors, these imbalances predisposed Czechs to favour partition, while the Slovaks were divided in their view of the federal partnership as either an obscuring shadow or a sheltering wing.

Basically one of the most stable and prosperous of the post-Communist states, the Czech Republic has been recovering from recession since mid-1999. The economy grew about 2.5% in 2000 and should achieve somewhat higher growth in 2001. Growth is led by exports to the EU, especially Germany, and foreign investment, while domestic demand is reviving. Uncomfortably high fiscal and current account deficits could be future problems. Unemployment is down to 8.7% as job creation continues in the rebounding economy; inflation is up to 3.8% but still moderate. The EU put the Czech Republic just behind Poland and Hungary in preparations for accession, which will give further impetus and direction to structural reform. Moves to complete banking, telecommunications and energy privatization will add to foreign investment, while intensified restructuring among large enterprises and banks and improvements in the financial sector should strengthen output growth.