, being monopolised by the state : exports were predominantly aimed at soviet and other communist countries ’ markets. especially high was the share of foreign trade with the soviet union ( more than 40 % ). connected with this was the fact that czechoslovakia maintained a rather large proportion of heavy industries, an extensive but mostly obsolete stock of productive capital, along with underdeveloped services, neglected infrastructure and inadequate environmental protection. in coping with the challenge of a system substitution the contraints and even the counterproductiveness of the partial reform approach seemed to be recognised and accounted for in the czechoslovak case. this was perhaps a lesson learned from the failures of reform attempts in the past. there appeared to be a widely shared consensus that a system replacement could hardly be achieved without a sufficient initial “ shock ”. accordingly, the strategy followed aimed at a simultaneous implementation of the package of interrelated measures in order to secure sufficient impact on the behaviour of economic agents. given the above general consensus, there were, however, widely differentiated stances as regards the contents of the respective “ minimum packages ”, their sequencing and the speed of their implementation. in previous discussions two alternative options - “ fast ” and “ slow ” movers - used to be identified as a shock therapy approach against a step - by - step, gradualistic or evolutionary type of approach. the czechoslovak scenario opted for a transition path which was implemented as quickly as feasible, implying some parallel features with the shock therapy approach, in particular with reference to one stroke, simultaneous liberalisation of domestic prices, foreign trade and foreign exchange, and the introduction of limited currency convertibility ( on current account for registered domestic businesses ) at the very beginning of the transition process. the shock therapy approach was developed for the stabilisation programmes and followed in some countries of latin america as well as in poland and former yugoslavia, where the dominant target of the economic policy was to cope with hyperinflation, to stabilise the economy as much and as fast as possible. the initial conditions in the csfr differed, however, from those of the countries mentioned. strategy of systemic and structural reforms the programme of political and economic transformation was formed during 1990, started in january 1991, and continued in the czech republic after the split of czechoslovakia. from the start, the program included five main parts : - macroeconomic stabilisation policies : a restrictive fiscal and monetary policy to remove the monetary overhang and to reintroduce macroeconomic equilibrium. - liberalisation of

czech monetary policy used two basic tools to fight inflation : targeting monetary aggregates, and the nominal anchor of a fixed exchange rate. the czech experience with curbing inflation during a transformation period is successful, compared to other transforming economies of central europe. when, in january 1991, the bulk of prices in the czech economy were freed after 40 years of central price fixing, the result was a yearly increase of the price level by almost 58 %. however, no inflationary spiral evolved, and, since 1992, inflation showed a falling long - term trend towards a single digit rate in 1995 - 1996. the initial jump of prices in 1991 was not accompanied by a similarly steep increase of nominal wages. instead, real wages fell. that created some room for subsequent increases in real wages without serious inflationary consequences. in 1995 and 1996, however, the growth of real wages, which - if aggregated over all sectors - was faster than the increase in productivity, became one of the potential inflationary dangers. the nominal anchor of the fixed exchange rate played an important role in the relatively good czech results in fighting inflation. instead of repeated smaller devaluations as in poland or hungary, the czech republic used a combination of a large initial devaluation and a subsequently fixed nominal exchange rate. in 1990 - before the start of the full transformation programme - the currency was devalued by more than 50 %. that subsequently enabled us to keep the nominal exchange rate stable for five years. after the introduction of a wider 7. 5 % fluctuation band in 1996, the exchange rate is within the band. transformation involved so much fundamental change that its start inevitably led to an initial fall of output and gdp. however, part of the former higher output level was simply feeding the enormous waste which went on throughout the command economy. in 1993, gdp stagnated partly due to the split - up of czechoslovakia. economic growth was resumed in the czech republic in 1994 and continued in 1995 and 1996 as a fast growth period. unemployment has been kept low during the whole transformation period, thanks mainly to the rapid emergence of new private firms, and a large shift of labour into the previously underdeveloped service sector. even with microeconomic restructuring going on, unemployment is not expected to exceed a 4 % level in the near future. monetary policy tools in a command type economy, monetary policy reflected state plans expressed mainly in physical terms. planned direct credit allocation was linked to the planned growth of national income. credits to