Czech Republic
Hungary
Poland
Slovakia
As the immediate aftershocks of the transition to market subside, the founders of the Visegrad Group—the Czech Republic, Slovakia, Hungary, and Poland—face the challenge of achieving sustainable economic development. (The fifth member of the group, Slovenia, joined in January 1996, and is not considered in this article.) One key ingredient of this growth is the development of a competitive, financially sound, and dynamic private sector. The latest statistics confirm that—quantitatively at least—the private sector share of these countries' overall output, employment, investment, and trade has noticeably increased.
In the four Visegrad countries the private sector in 1995 accounted on average for 60 to 70 percent of GDP (up from 4 to 25 percent in 1989), and for 55 to 65 percent of employment, compared with 10 to 20 percent in 1989—except in Poland, where employment already stood at 47 percent in 1989 (see table). Although part of this growth has come from privatization, particularly in the Czech Republic and, more recently, Hungary, much of the private sector growth has been from new startup enterprises with no links to the earlier tenets of central planning. New businesses in the region—though often self-employed or small-scale and in the service sector—are generating far higher profit margins than the state-owned sector.
The surge in private activity has been accompanied by an industrial decline in the Czech Republic and Slovakia, while in Hungary and Poland, ownership changes have resulted in a setback in agricultural production. Meanwhile, the expansion of services, as a percentage of GDP, has been pervasive. In all four countries, ownership changes have been relatively slow in industry, and more vigorous in agriculture and the service sector.
Private Sector Growth in the Visegrad Countries, 1989-95
(percentage of total)
| Czech R. | Hungary | Poland | Slovakia | |||||
| Item | '89 | '95 | '89 | '95 | '89 | '95 | '89 | '95 |
| GDP | 5 | 60 | 20 | 70 | 28 | 59 | 10 | 62 |
| Employment | 16 | 65 | 20 | 65 | 47 | 66 | 10 | 55 |
| Credit | 13 | 69 | 37 | 30 | 16 | 37 | 29 | 39 |
| Deposits a | 71 | 69 | — | 75 | 64 | 77 | 61 | 76 |
Note: The base year for credits and deposits is 1991.
— Not available.
a. Including households.
Source: The authors.
The private sector share in the Czech economy has grown from about 5 percent of GDP in 1989 to 60 percent in 1995. Most of this growth is due to small-scale, owner-operated businesses, while the output of the large-scale industrial state enterprises has declined. New businesses are mushrooming, especially in labor-intensive light manufacturing and service industries, and last year the private sector already employed 65 percent of all workers, up from 16 percent in 1989.
The private sector's share in total credit rendered increased from 13 percent in 1991 to 69 percent in 1995. This increase was helped by the Czech Republic's balanced fiscal strategy, which included government recourse to domestic credit, as well as the aggressive enterprise privatization program and the bank lending flows, as part of bank restructuring policies. The private sector share of bank deposits has been stable over the period. While the household sector is a net lender, the difference between household deposits and loans to the sector is much narrower (7 percent) than in other Visegrad countries, where households provide most of the financing for the government and enterprise sectors.
Fixed investment declined from 27 to 29 percent of GDP in 1989-90 to 20 percent in 1993-94, and then shot up to 31 percent in 1995. The decline in domestic investment until 1995 was partially offset by an increase in foreign investment, which totaled $3 billion by the end of 1994, or 2.5 percent of GDP during 1991-94. The country attracted significantly greater investment than Poland or Slovakia. Lower tax rates, lower property rentals, better telecommunications services, and solving some other infrastructure problems faced by businesses would probably ensure a steady flow of foreign investment.
The private sector share of GDP in Poland rose from 20 percent in 1989-90 to 70 percent in 1995, a more than fivefold increase in dollar value over a period of six years. There has been a shift in the sectoral mix toward trade and services, as in the other Visegrad countries, with the number of infrastructure firms slightly up and manufacturing firms down. In 1993 three times more private businesses registered than in 1990, but their average number of employees was only about one-fourth of the 1990 figure. Labor productivity and value-added per worker have increased over this period. Aside from the rise in small-scale new businesses, the number of self-employed has also almost doubled since 1990, to around 800,000 people.
Due to persistent fiscal deficits, credit to enterprises has declined, while credit to the government (in the form of securities purchased by banks) has increased. Households, which have been net lenders since 1991, provide most of the lending to the public sector. Three-quarters of the total deposits in the system are attributable to the private sector.
As elsewhere in the region, total investment declined as a percentage of GDP over the transition period. Total investment accounted for 26 percent of GDP in 1989, declined steadily to 15.5 percent in 1992, and recovered after 1993, reaching 22.5 percent in 1995. This recovery was a result of the surge in foreign investment, which offset the decline in domestic investment in real terms. Over 1991-95 as much as 28 percent of investment in Hungary was foreign. With $10.6 billion in cumulative FDI during 1991-95, Hungary attracted more foreign investment than all its transition neighbors. The Privatization Law adopted in 1995 to pursue privatization aggressively through 1997, including the sale of partial or total stakes in blue chip infrastructure companies, has already had a dramatically positive impact on FDI: Hungary attracted $4 billion in 1995.
The private sector share of Poland's GDP rose from 28 percent in 1989 to 59 percent in 1995, representing a threefold increase in dollar value between 1989 and 1995. The Polish private sector now produces mainly in trade and industry, although most industries are still in the state sector. Newly privatized companies in Poland last year showed an average rate of return more than double that of Polish enterprises as a whole, according to a recent report of the Central Statistical Office (GUS). Net profitability for firms that were privatized was 4.3 percent in 1995, compared with a profit rate of 2.0 percent for all enterprises. Over the past six years, 1,022 state-owned companies employing 1.1 million people have been turned over to private hands. As in Hungary, the share of agriculture in GDP has declined, while the shares of industry and services have increased.
As elsewhere in the region, the average private Polish business is small-scale. Attesting to their dynamism, small-scale businesses created 3.5 million new jobs between 1991 and 1993 and provided real wage increases of 3.5 to 4.0 percent in 1994 when public sector wages were stagnating.
Despite the evidence of a dynamic private sector, lending to this sector has been limited due to the increase in credit to the government—and to some large but troubled state-owned enterprises—which has taken as much as 70 percent of lending since 1991. The private sector share in total credit increased in 1995, but has generally been low despite real GDP growth of 4 percent since 1992. On a net flow basis, between 1991 and 1995, total credit to households and private enterprises increased by $7 billion, while credit to the government increased $8.5 billion; state enterprises experienced a credit decline of $1 billion during the period. As in Hungary and Slovakia, three-quarters of total deposits are from the private sector, mostly households.
Total fixed investment has declined as a percentage of GDP, from 38.5 percent in 1989 to 15.2 percent in 1992 and 16.0 percent in 1994. Private investment accounts for at least two-thirds of total investment, and is mostly in industrial manufacturing and equipment. Foreign direct investment (FDI) over 1991-94 was weak, but strengthened considerably in 1995. In Poland FDI accounted for little more than 4 percent of total investment in 1994, compared with 25 percent in Hungary. The balance of payments value of FDI in Poland over 1991-94 was merely $1.6 billion, much less than Hungary's $6.6 billion and the Czech Republic's $3.0 billion, each of which has about one-quarter the size of Poland's population and 40 percent of its GDP. Such favorable developments as the debt forgiveness from the London and Paris Clubs in 1994, the growth in exports and domestic demand, and the prospect of large infrastructure contracts, as well as privatization in the manufacturing sector (for example, in car manufacturing in 1995), should accelerate FDI flow. In 1995 Poland attracted $2 billion in foreign capital, more than the total for the period between 1991 and 1994.
Despite little progress in privatization in Slovakia since 1993, the private sector contribution to GDP has increased from 27 percent in 1991 to 62 percent in 1995. In dollar terms, private sector activity is now nearly four times greater than in 1991. Most of this increase comes from services privatized in the first wave of voucher privatization, as well as private investment in industry, construction, retail trade, and road transport. Most private businesses are small-scale and are service-oriented. As uncompetitive heavy industrial firms laid off their workers, enterprises got smaller, although state owned enterprises are still employing on average fourteen times more workers than are registered private enterprises.
Initially, scaled-down state intervention, liberalized prices, and lower barriers to trade helped the growth of private businesses. But major restructuring efforts are still required in order that these businesses may become competitive on a sustainable basis. At present, profitability is low or negative in most sectors, and many state-owned enterprises continue to rely on government subsidies. (In 1993 state subsidies—divided evenly between the agricultural and industrial and transport sectors—reached nearly 6 percent of GDP.) Together with the tax arrears of the state sector (5 percent), the total burden to the budget came to nearly 12 percent of GDP.
Not surprisingly, net lending to the government (via banks' purchases of securities) increased in 1991-95. The banks, as a consequence of their nonperforming loans, reduced lending to indebted state-owned enterprises (SOEs). The SOEs covered their deficits out of government borrowing. As the earlier state cooperatives received about two-thirds of all lending increases to the private sector, households and new enterprises received only marginally more credits. Fixed investment declined sharply from 35 percent of GDP in 1991 to 23 percent in 1994, rebounding in 1995 to 28 percent. The low level of total investment has been partly due to the low level of foreign investment. From 1992 to 1995, FDI in Slovakia reached only $561 million, or 1 percent of GDP. Political instability, reversals and delays in privatization, and perceptions of protectionism toward state enterprises have reduced FDI flows to Slovakia.
Michael Borish is Consultant and Michel Noël is Division Chief, Europe and Central Asia Office, the World Bank.
This article is based on the authors study "Private Sector Development During Transition—The Visegrad Countries," Discussion Paper no. 318, World Bank, 1996, 175 p. To order: Ms. J. Freund, tel. (202) 473-9771.
Privatization of the Czech Republic's four largest commercial banks, the Ceska Sporitelna, Komercni Banka, Ceskoslovenska Obchodni Banka (CSOB), and Investicni a Postovni Banka, owned largely by the National Property Fund (NPF), the state privatization agency, has been postponed, the Czech National Bank (CNB) announced just before the May election.
Earlier, the government had rejected a plan to sell part of the NPF's 45 percent stake in Ceska Sporitelna through a global depository receipt (GDR) issue. Ceska Sporitelna currently controls about 55 percent of all retail deposits in the country, mainly owing to its role during the communist era as the only savings bank for ordinary citizens. The bank expects its net profit to double in 1996, having fallen to 1.37 billion koruna ($50 million) in 1995 from 1.63 billion in 1994. The GDR issue was intended to finance the bank's restructuring program, aimed at rationalizing its branch network and its use of human resources, as well as financing new investment designed to diversify its customer base. It had expected to raise up to $80 million for this purpose. However, privatization, and not the raising of funds, was the principal aim of the GDR issue.
The NPF's stakes in the other three large banks are as follows: 49 percent in Komercni Banka (the country's largest bank), 33 percent in Investicni a Postovni Banka, and more than 20 percent in CSOB. In addition, 20 percent of CSOB is owned by the Czech Ministry of Finance, 27 percent by the CNB, and 24 percent by the National Bank of Slovakia. The four largest banks between them account for around 70 percent of the banking sector. All of them are expected to perform strongly in 1996.
The Big Four play a crucial role in the economy. They are a primary source of debt financing for most of the country's large and medium-size companies, and they also have significant shareholdings in many companies through subsidiary investment fund companies. Critics of the voucher privatization scheme have pointed to this as evidence that the state still controls the country's industry through its shareholdings in the large banks (though no investment fund is allowed to own more than a 20 percent stake in a company, and many large investment funds are not associated with the banks).
Another argument for bank privatization is the perceived need for strong foreign partners. So far, only a limited number of foreign banks—including Citibank, ING, Credit Anstalt, and Bayerishe Hypotheken und Wechsel Bank of Munich—have received licenses to operate, while some moved into the Czech market through acquiring stakes in smaller-size local banks. This is now changing, as the profitability of the sector increases, and as many banks shift their focus from corporate banking to retail and private banking services. The CNB reversed its two-and-a-half-year moratorium on new banking licenses, announcing that it is granting licenses to Westdeutsche Landesbank Girozentrale and the Midland Bank. It seems likely, however, that licenses for foreign banks will be reduced to just one or two each year for the next two years.
A partnership with a foreign player is not necessarily the only option available to the banks. Komercni Banka predicts a further rise in profits in 1996 to 6 billion koruna, up from 5.1 billion in 1995. The bank plans to declare a 20 percent dividend out of its 1996 profits, compared with 19 percent in 1995 and 12 percent in 1994. On May 22 Komercni Banka reported net profits of 2.26 billion koruna for the first quarter of 1996, a 54 percent rise over the same period last year. The increase in profits was largely due to higher income from foreign exchange and securities operations, as net interest income fell by 8.6 percent.
CSOB, although still almost fully state- owned, outperformed all other domestic banks in terms of earnings per share in 1995, outdoing the 1994 top performer, the privately owned Zivnostenska Banka, which is closely associated with the German- based BHF-Bank. All of the largest four banks have recently received good international credit ratings. Although heavy bad loan provisions have hit recent profits, it is widely felt that the worst is over, and the prospects for future profits are healthy. Although the competition in the market is expected to intensify, the banks seem determined to restructure quickly without the need for pressure from new owners.
Based on news agency releases and reports of Oxford Analytica, the UK-based international consulting firm.