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Czech Transformation – 18 Years After

English Pages, 8. 4. 2008

Thank you for organizing this gathering, for bringing Czech and Egyptian politicians, and especially Czech and Egyptian business people together. We – I suppose all of us here – are motivated to contribute to the expanding and intensifying of Czech-Egyptian relations. I am very satisfied that my yesterday’s talks with President Mubarak and other leading Egyptian politicians demonstrated such an interest, and I would stress, on both sides.

When I met your Prime Minister last year at a conference in Italy, we discussed our experiences with the transformation of our countries and decided to continue here. Let me say a few words about it.

In the last already more than eighteen years, I have been actively involved in a radical transformation of a former communist Czechoslovakia into a modern European country based on parliamentary democracy and on a liberalized, deregulated, open and privatized market economy. Some aspects of our transition were probably very specific (and I do not have the ambition to present our views as a model for anyone else to follow) but I do believe that some of our experiences are more or less generally relevant.

The preconditions for success in our endeavor were the following three, mutually interconnected elements:

- to have a clear and transparent concept of where to go;

- to dispose of a feasible strategy how to get there;

- to persuade the majority of the people to support it.

We more or less succeeded in fulfilling all of these tasks which are all of equal importance, that is to say no one is more important than any other.

We understood that

1. any fundamental change of that type and scope is a domestic task because democracy and market economy cannot be imported, cannot be agreed upon at international conferences, cannot be passively “acquired” as a foreign investment. It is a do-it-yourself piece of work;

2. it is a sequence of policies, not a once-for all policy change;

3. liberalization, deregulation, desubsidization and privatization are crucial parts of it and are to be done as soon and as radically as possible. The people should be informed in advance about the costs of this maneuver that may be – especially in the short or medium term – relatively large;

4. societies (and economies) undergoing such a transition remain fragile and vulnerable and the economic and social policies in the post-transformation period should be very cautious;

5. in our part of the world, the political and economic changes coincided. Our experience taught us that the changes in both fields, political and economic, reinforce one another.

The political transition was relatively easy. It was sufficient to liberalize the entry in the political market. Nothing else.

The economic transition was more difficult and more time-consuming. The key to the minimization of the transformation costs was radical opening-up of markets together with very cautious fiscal and monetary policies. We had to liberalize prices in the environment of a monopolistic structure of the economy and before privatization. The so important competition was imported by liberalizing foreign trade and by radically devaluating the currency.

We privatized the economy without having domestic capital and capitalists. We privatized the whole economy, not just individual firms. We privatized businesses as we found them and not, as some of our critics wanted, after bailing them out financially first. If we were to wait for such bailouts to happen, transformation and privatization would have never started.

There has been a continuing discussion about the impact of economic aid on such a transition and, more generally, on the economic development as such. (I do not have in mind humanitarian help in catastrophic situations but aid as an economic phenomenon.) Our experience tells us that the economic and financial aid from abroad is of only a marginal importance.

There is a huge gap between the foreign aid rhetoric and foreign aid reality and as a result of it the size of aid is usually very small. I do not believe this can ever change. It is in the interest of the foreign aid community (which is a specific rent-seeking group) to make the gap as wide as possible.

The form and structure of aid are not very good either, because they are based on the interests of the donors, not on the needs of those who are supposed to receive and use it.

And, finally, the aid is never free. It is, in many cases, very costly in the long run and even the gifts, not to speak about soft loans, turn out not to be free or so soft after all. The lending institutions have a bureaucratic incentive to lend and to be involved. They are not ready to watch the world passively, risking that their irrelevance will be revealed.

What is essential is trade, but when I say trade, I mean free, not fair, trade, because fair trade means protectionism in disguise. To expect that politicians and bureaucrats are better and fairer than markets is a myth.

There are – as we know – many ways of this, very dubious “fairness”, not just the traditional methods – tariffs and quotas. Economic activities are being nowadays heavily influenced by the imposition of the so called international standards. It has become “politically correct” (and claimed as morally superior) to advocate the implementation of various external “standards” and to consider them obligatory, regardless the level of economic development. I have in mind labor, social, safety, environmental, hygienic, etc. standards which are presented as exogenous “constants” of globalized human society whereas they are “variables” dependent not only on traditions, customs and habits but principally on GDP per capita levels. The overall imposition of such standards is an effective way to eliminate the existing comparative advantages of economically less developed countries and to block their successful participation in the world economy.

I do not want to say that all “standards” are wrong, but they should be introduced by domestic politicians and legislators, not by international organizations.

Very prominent role is currently played by the environmentalists with their new and very dangerous weapon called global warming and climate change. As I said at the UN Global Climate Conference in New York City last September: “Different levels of development, income and wealth in different places of the world make world-wide, overall, universal solutions costly, unfair and to a great extent discriminatory. The already developed countries do not have the right to impose any additional burden on the less developed countries. Dictating ambitious and for them entirely inappropriate environmental standards is wrong and should be excluded from the menu of recommended policy measures.” Developing countries must be allowed to go along the same path of development as the countries that did so a century ago.

To summarize, countries in transition need political democratization and creation of institutions of market economy. They need open markets in the rest of the world. They need such social, labor, environmental, safety, hygienic and other standards that they define on their own and that reflect their economic level, not standards imposed upon them from the outside. They need trade, not aid.

Václav Klaus, Czech-Egyptian Business Forum, Four Seasons Hotel, Garden City, Cairo, 8 April 2008