Cato Policy Forum: Czeching into Capitalism

• Regulation

Prime Minister Václav Klaus of the Czech Republic spoke at a Cato Policy Forum in the Institute’s F. A. Hayek Auditorium on December 4, 1995. Excerpts from his remarks and answers to questions from the audience follow.

I try to follow the work of the Cato Institute. I read your publications, and I find them really helpful. I was informed about your new building, but I didn’t know it was as beautiful as it is. If the content is as good as the container, then it’s absolutely great. In his introduction, Ed Crane mentioned my remark about the negative influence of advisers who come to my country from yours. Well, I have to rush back to Prague tomorrow night and go directly from the airport to the Czech parliament, because we start at nine o’clock the next morning to discuss the state budget for 1996. As you know, in the Czech Republic the budget must always be balanced, because we know that that’s a rule of rational behavior. So we are presenting — for the sixth consecutive year — a balanced budget, which I think is an achievement.

Let me exaggerate slightly and suggest that we are ready to send some advisers to your country to explain how to balance the state budget. But I must tell you that there is nothing mysterious about it. There is no sophisticated economics behind it; it’s simply the result of the ability of political leaders to say no to excessive expenditures. It is now almost six years after the fall — after the collapse — of communism. We have entered what we call the post‐​transformation stage. In this stage the basic transformation measures — the things that can be done by the government, by the politicians — have already been taken. There are now no extraordinary measures that we expect to implement in the near future. As I like to put it, the operation is over, and now we are in the recovery room. The bold and enormous steps have already been taken. The main changes have been made. The challenges we face and the tasks we have to accomplish are now more or less familiar ones, which means that the elementary economics textbooks are more useful now than they used to be some five or six years ago.

As you know, we started the whole transformation process with a very clear vision of where we wanted to go. And the terms that are very often heard in this auditorium were the catchwords that we were using even before the Velvet Revolution and that we tried to make real afterwards: laissez faire, or, as I always say, a market economy without any disqualifying adjectives; private property; small government; the rule of law; liberty; and individual responsibility. I know that those words may sound commonplace to this audience, but I am sure you know that they are very uncommon, not just in the postcommunist world, but in many places in the Western world.

Vision is absolutely crucial, but vision alone is not sufficient. You must have a strategy to implement the vision. When I say strategy, I am not speaking about constructivistic blueprints for a transition or a transformation. As we are in Hayek’s auditorium, I think it’s not necessary to explain this point, because we know that it’s not possible to introduce the invisible hand of the market by means of the visible hand of a very clever or sophisticated or omnipotent politician or intellectual. That’s not possible. We knew that we had to liberalize, deregulate, and privatize at a very early stage of the transformation process, even if we might be confronted with a rather weak and therefore inefficient market. So our strategy was flexible and pragmatic. We didn’t want to mastermind the transition from communism to a free society because such a complex system can and must evolve. It can’t be dictated from above.

The matter was conceptually, at least for me, very simple. I believed in the basic principles we share, and I was pretty sure that it was not necessary to wait for the creation of a new science. You recall that several years ago there was a debate about a new science, or subscience, or subdivision of a science: the economics of transformation. That is nonsense. We don’t need a special economics of transformation. I think it’s sufficient to apply standard economic, sociological, and political science reasoning. I stress three elements: liberalize, deregulate, and privatize.

Privatization in our country was absolutely crucial, and you know we started from nothing, really from zero private property, not from 10, 20, or 30 percent of the economy in private hands. It is sometimes difficult to explain to audiences like this one what it means to privatize the economy from nothing, because everyone offers us the example of brave Margaret Thatcher. But as one of my colleagues recently put it in a very precise way, our task of privatization was to bring the economy to the point at which Margaret Thatcher started to privatize the British economy. That’s a very important point that is misunderstood, or at least not sufficiently understood, in the West. I have to laugh whenever I meet Western bank advisers, or consultants, or experts from this country whose first question is about privatizing the post. I say that that is the last question; the first question is to privatize the first grocery store or the first hairdresser or the first cafe or the first small car repair shop or something like that. Our task in the transition from communism to a free society was to privatize to the point where Margaret Thatcher started. The issue is not the same as in your institute, where you have the luxury of discussing whether the U.S. Postal Service should be privatized, because that is a post‐​transformation task, so to speak.

I think that conceptually it’s very important to distinguish the so‐​called transformation form of privatization from what we call the classical, or standard, form of privatization. Conceptually, those are two totally different things, and it is necessary to use for them totally different methods. Consider Great Britain. They succeeded in privatizing three or four firms a year. As I always stress, our task was to privatize three or four firms per hour; that’s the crucial difference. Now we have reached a point where we can discuss whether to privatize the railway system fully or partly. That’s really another stage, and I have to stress the difference because it’s absolutely crucial. At any stage, however, I am absolutely sure that a free market economy, with private property and prices that are free to move and to reflect the real value of things, is the only way to preserve the world, to preserve humanity, and to preserve the environment. We know that the most dangerous state of affairs for the environment is to liquidate private property and to do away with prices as a tool for informing us about relative scarcities. I’m sure you know that the worst environmental damage occurs in countries without private property, markets, or prices. Of course there is some room for some government activity, but not for overactivity. I’m very much against excesses of environmentalism. At home I stress that private property with market prices is the precondition for solving environmental problems. What the government can do, in addition to defining and protecting private property, is a supplement, not a replacement.

Our task now is a common one, one that we share with you. Our task is to fight for economic freedom. Our task now is to avoid the reappearance of restrictive and unproductive state interventionism and dirigisme, which are advocated these days under new flags but are no less dangerous than in the past. Nobody’s now marching with the communist flag in our country or, really, in other countries in Central and Eastern Europe. There is little danger of introducing policies based on the old collectivist ideology; the danger is the introduction of new policies based on special interests, on the ideology of corporatism and syndicalism, on theories of so‐​called fairness, on aggressive environmentalism, on accusations of “social dumping,” on communitarianism, and so on. Those are the dangers as I see them.

Our heritage has made it possible for us to avoid some of those dangers. We in the Czech Republic definitely enjoy a different inheritance than do some other countries in the postcommunist world. I refer first to our inheritance from the prewar democratic Czechoslovakia. We also inherited something from the 1960s. As some of you probably know, we Czechs made our first attempt to transform — in today’s terminology, to restructure — the communist system in the second half of the 1960s. It was at that time, not just in the last few years, that we discovered Hayek, Friedman, and other free‐​market thinkers and thinking. That was a very important experience for all of us. The generation that was in its postgraduate years in the second half of the 1960s had a unique opportunity to travel and to study abroad — to be in contact with other ideas. My wife, for example, spent 10 months studying in Amsterdam. Our ambassador to this country spent a year studying at a university in Montreal, Canada. I spent a term at Cornell University. During that time of relative freedom, my generation was very privileged to be able to learn about and to be in contact with the rest of the world. After that, we were not allowed to travel abroad. I was not allowed to travel to the West for the next 17 years, until 1986. The young adults who had traveled during the second half of the 1960s more or less created the first post‐​Velvet Revolution government and occupied the crucial posts.

Ironically, some of our strength is an inheritance from the hostility following the Soviet invasion of Czechoslovakia in 1968. Our friends and counterparts in Hungary and Poland in the 1980s were able to visit Washington; for us that was merely a dream. To meet an American economist, we had to go on vacation to Hungary or to Poland to participate in a symposium. Those gatherings represented for us the only chance to meet someone from your country.

In our country in the 1970s and 1980s, people like me were definitely on the other side of the barricade and had absolutely no chance to do anything in cooperation with the government. Such was not the case in other postcommunist countries. All our counterparts — in Hungary, in Poland — were members of various government and communist party commissions on restructuring and reforming the system. They were involved deeply in that process, which not only is time‐​consuming but influences your thinking because you are engaged in trying to reform the system. We were never involved in such activities. We had no chance to be involved. Nobody asked us for advice, and therefore our thinking remained clear and straightforward. We never considered reforming the communist society and economy. We knew that they had to be rejected.

Another important part of our inheritance is a tradition of prudence. The Czech Republic had a very low macroeconomic imbalance. We had practically no foreign indebtedness. Countries seem to have a propensity to be indebted, I discovered, when in 1980 I compared the per capita indebtedness of communist Czechoslovakia, Poland, and Hungary and discovered that per capita indebtedness was 10 times higher in Poland and Hungary than in Czechoslovakia, and that the ratio in 1980 was the same as it had been in 1930.

As I’ve said, we have entered the post‐​transformation stage, so the dilemmas we face are more or less the standard ones — for example, maintaining internal and external economic equilibrium and balancing growth and stability. We live in a period of very rapid post‐​transformation recovery. This is not the kind of macroeconomic cyclical behavior described in standard economics textbooks. This growth is occurring after several years of declining gross national product, of what I call the “transformation shakeout,” or shakeout of activities that are simply not viable under the new regime of unsheltered and unsubsidized markets, from which the old Soviet Comecon system of barter and trade is gone. There was a necessary decline.

Now, after that shakeout, has come a very rapid economic recovery. Economic growth this year is expected to be between 4 and 5 percent. We will present the budgetary figures for next year in the parliament Wednesday morning. Just before leaving the country three days ago I got the figures for October industrial output and output in the construction industry. The October figure for industrial output is an incredible +19 percent and for construction it is +21 percent. So we have very rapid economic growth and the standard dilemmas to accompany it: how to reconcile such rapid growth with continuing disinflation, which is a standard problem all economies face, not a transition or transformation problem, and how to reconcile very rapid growth with very low unemployment. As you may know, the last figure for unemployment in the Czech Republic was an incredible 2.8 percent, which is definitely below the natural rate of unemployment, at a time of very, very fast growth of demand for labor and very fast restructuring. Another problem is the “Czech Phillips curve,” the so‐​called tradeoff between inflation and unemployment; again, this is a familiar dilemma. The rate of inflation is too high for us; the last figure for October to October was 8.1 percent, which is very high compared to the rate in your country, but as you know, it’s one digit less than in other postcommunist countries, which typically have at least double‐​digit inflation. So those are the standard dilemmas we now have to face.

In closing, let me say that we are and we want to be an open country in all respects. You may know, or perhaps not, that last Tuesday the Czech Republic entered the Organization for Economic Cooperation and Development; we were the first postcommunist country to do so. We consider acceptance in that very prestigious club another important international recognition of the achievements of our country. For me it would have been a dream several years ago to think about the Czech Republic as a member of the OECD. As you know, we intend to become a member of NATO. We intend to become a member of the European integration process, even with all our questions and sometimes objections to the form of the integration process and to the extensive regulation and control from Brussels. Nevertheless, we want to be a member of that group because we want to be a normal European country.