07/05/2014
Texts in English
Václav Klaus: Notes for the introductory comments at the Budapest conference
Transition in Perspective


A.

Many thanks for organizing this gathering. We – who came to Budapest and prepared our contributions to this important and much needed project – are personally motivated in preserving a correct understanding of the unique and unrepeatable era after the fall of communism. We are already one generation away from it. To our great regret, the permanently ongoing political disputes in our countries are very often based on a caricature of this historic era.

We should accept part of the blame. We have been always stressing the differences between individual countries, not similarities. We emphasized the originality of reforms (and reformers!) in one country or another without trying to see the common denominator of the diverse experiences and procedures (very often different only because of different terminology!).

B.

Let me shortly sum up the thoughts and the attitudes of the Czech reformers at the time:

1. We were convinced of the necessity of a total and unconditional liquidation of the communist political and economic system. We wanted a rapid systemic change. We explicitly and very early proclaimed that we wanted capitalism and resolutely refused all dreams about “third ways” or about possible and desirable convergence of economic and political systems.

2. We knew that transformation was not an exercise in applied economics and that all theories of “optimal sequencing of reform measures”, so popular with economic theoreticians, were of a very limited use. The transformation process was – inevitably – an ad hoc mixture of constructivism and spontaneous evolution.

3. We wanted to avoid a non-transformation. We didn´t want to give a chance to all kinds of rent-seeking groups which sought to preserve the status quo and/or steal the whole transformation process to the benefit of their vested interests. This influenced our position vis-à-vis all versions of gradualism which we considered a non-reform. We did not believe that gradualism was a realizable reform strategy (in a politically free society) and we, symmetrically, disagreed with the term “shock therapy” both as a useful reform concept and as a description of reality in our country and elsewhere. We always refused to accept the dilemma “shock therapy vs. gradualism” as meaningful and competing alternatives. The term “shock therapy” is not an analytical term. It is a political accusation used by socialists like Joseph Stiglitz as a political attack.

4. We felt that the transformation project had to be ours, based on our ideas and on our realities. We tried to find our own “Czech way” and to give the people the chance to be part of the game, not to be just passive observers. We did not consider ourselves representatives of international institutions and we did not feel any necessity to please them.

5. We considered both the economic and political reforms interconnected and indivisible. To separate them à la China was in Europe impossible. The whole concept of gradualism was (and is) based on the belief in the possibility of a detailed orchestrating of reforms. It would have been, however, possible only with the absence of political freedom which was not our case.

6. There were, of course, some inevitable steps and “rules” which we followed and respected:

- a radical restructuring of government institutions started immediately – some were abolished, the role of others was substantially changed;

- we were aware of the enormous importance of macroeconomic stability for the success of transformation;

- liberalizing prices without a parallel liberalization of foreign trade would have been a tragic mistake especially in a small economy;

- the role of the exchange rate is crucial. A few days before the price and foreign trade liberalization, we carried out a devaluation of the Czechoslovak crown which more or less accepted the level of the existing black market exchange rate. Our decision led to a very unpleasant dispute with the IMF which wanted a deeper devaluation;

- part of the dispute was about whether to devalue prior to price and foreign trade liberalization or after it. We originally wanted to do it after but were convinced that the ex-ante devaluation is better. It proved to be a good advice on condition that we were able to choose a “good” exchange rate;

- we originally wanted a flexible exchange rate but we understood that the role of a fixed exchange rate as a much needed anchor when everything else was rapidly moving was a correct idea as well;

- all of us were and are in favour of having as perfect institutions as possible and as quickly as possible. Many disputes were (and continue to be even now) connected with the issue of whether it is obligatory to have a fully developed institutional framework of the market economy before the deregulation of markets and the beginning of privatization. This is, however, a misunderstanding. The fair and meaningful dispute is about something else:  about whether (and into what extent) to stop other aspects of the transformation process in case the institutions are not yet perfect. The Czech experience tells us that:

- stopping deregulation, liberalization, desubsidization and privatization was practically impossible,

- even if it were possible, the costs would have been enormous,

- the institution building is an endless task and takes time.

7. The decisive part of the transformation process was privatization. It was based on several ideas:

- our goal was to privatize practically all the existing state-owned firms, not just to allow the setting up of new firms on “green fields”;

- fast privatization was considered to be the best contribution to the much needed restructuring of firms (we did not believe in the ability of the government to restructure the firms);

- privatization of firms in the real economy couldn´t wait for the privatization of banks;

- because of the lack of domestic capital (which did not exist in the communist era) and because of the very limited number of serious potential foreign investors, the firms had to be privatized at a low price. This idea led us to the concept of “voucher privatization”, which played an important, but not dominant role. Only less than one fourth of the Czech privatization was realized by means of voucher privatization.

From the very beginning, the Czech reformers knew that they had to privatize the economy they inherited as soon and as fast as possible. We used to have the smallest private sector in the whole group of communist countries which was caused both by the aggressivity of the communist takeover in February 1948 and by the lack of reformist economic changes after the 1968 events. We did not want to leave our to-be-privatized firms in an unavoidable “pre-privatization limbo” in which they rapidly lose their value. The fast speed of privatization we considered an asset, not a liability. We did not have any great interest in the size of privatization proceeds.

C.

What were the main macroeconomic outcomes?

GDP declined in the first three years after the fall of communism and started to grow as late as (or perhaps as early as) 1993. The “transformation recession” was considered an inevitable, and in many respects healthy development. The economy went through a J-curve-like development which we had expected and had announced in advance.

Inflation reached a high level only once, in the moment of price liberalization, in the year 1991. The non-zero rate of inflation in other years was a reality in the early transformation era but it was not a result of a lax macroeconomic policy. It was a “transformation inflation” connected with a large-scale readjustments of prices. A more restrictive monetary policy would have had disastrous effects on the very fragile Czech economy (as it happened later, in the years 1997-1998).

Václav Klaus, Speech at the conference “Transition in Perspective”, Kempinski Hotel Corvinus, Budapest, May 6-7, 2014.


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