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15 Years of Postcommunist Transformation and of Approaching the EU

English Pages, 26. 4. 2006

Many thanks for the invitation, it is a pleasure and privilege for me to be here again. As some of you may know, this is not my first visit at the University of Chicago. I have been here several times. My first visit here was three month before the fall of communism in August 1989, I was here then as an unknown economist from Prague, I remember most of all the George Stigler Memorial Lecture I was honored to delivere here 8 years ago. At that time I spoke mostly about our transition from communism to free society, from oppression, irrationality and inefficiency to freedom. It was still when the radical changes had been going on which is not the case now, in April 2006. We have already reached the stage of a normally functioning political system based on free competition of political parties and of an economic system based on private ownership and market economy.

The dismantling of communism and the building of a new political, economic and social system was not the only important feature of the last, already more than 16 years. The second one was our gradual approaching, adjusting to its requirements and in 2004 our formal entering of the European Union. Even that was an inevitability, there have been no alternatives to that. It has been, however, in several respects a process with much different characteristics than the first one – approaching the EU brought us less freedom, less democracy, less sovereignty, more of regulation, more of extensive government intervention. I will try to make a few remarks about both developments.

1. The radical transformation of our society after the fall of communism was not brought from outside.

It was done by ourselves, by our own domestic efforts, by our own decisive political activity, and it was made possible by the existence of an elementary political support of millions of the Czechs who wanted to get rid of the past. The unusual unity created in the moment of the Velvet Revolution was extremely important.

This unity was, however, only negative. The people were united “against something,” not in “favor of something.” To my great regret, for the majority of people the alternative to communism was not capitalism “Chicago-style”. Utopian “third ways” were being sought and promoted.

Proponents of these approaches opposed the establishment of political parties, because they were in favor of the so-called non-political politics and because they claimed an exceptional role for intellectual and cultural elites in the running of the country. In essence, they advocated “postdemocracy.”

In the economic sphere, they did not want to fully abandon the old economic system, but merely to deepen “perestroika.” They did not trust the market and reiterated the old dreams about the convergence of economic systems.

In the field of foreign policy, they were idealists without a realpolitik understanding of foreign policy and they planned to make the Czech Republic a bridge between the East and the West. We remembered all that again in January 2006 when we discussed the 15th anniversary of the start of our radical economic reform program.

2. We succeeded in doing something else. In 1990, a relatively small group of people was not afraid to say that the goal of our transformation was capitalism and a standard parliamentary democracy. We knew that there was nothing to wait for, because the euphoria that followed the collapse of communism would not provide us with an unlimited time for unpopular and often painful measures. We knew as well that it was necessary to take the advantage of the temporary weakening of various rent-seeking groups, which would – under normal circumstances – successfully fight for their own special interests and by doing that obstruct any change.

We faced many challenges – without proven instructions how to solve them. We had to liberalize prices in the environment of a monopolistic structure of the economy and before privatization.

We had to minimize inflation as well as the unavoidable and very sizeble loss of output. We understood that the key to minimization of the transformation costs were radical opening-up of markets and very cautious fiscal and monetary policies, I would say “Chicago-style”.

We “imported” competition by liberalizing foreign trade and by radically devaluating the currency. We accepted the – then dominant – doctrine that argued in favor of a fixed exchange rate as the only nominal anchor of a widely fluctuating transformation economy – even though I feared to do it, because I knew the Milton Friedman's “Case for Flexible Exchange Rates”.

We had to privatize without having capital and capitalists. We had to privatize the whole economy, not just individual firms. And we had to privatize 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 the financial bailouts to happen, transformation would have never started and the economy would have collapsed.

Requests to postpone the beginning of these radical changes until all the institutions of market infrastructure and the whole legislation would be perfect were similarly wrong. We knew that in a democratic society (not in an authoritative regime) institutions as well as legislation are endogenous rather than exogenous variables of the system. We knew, therefore, that they had to evolve gradually. We knew as well that the rule of law could not be prepared in the offices of a few brave reformers, because the systemic change is neither an exercise in applied economics nor a controlled laboratory experiment. It is important to know that. I hope we did not make many basic mistakes.

3. Our experience with the EU is a different story. This is something even less known than the post-communist reconstruction.

I must say that I have a problem with the American understanding of the European integration process. What I usually see or hear here is the unstructured, unanalytical and to some respect almost naive pro-integrationist argumentation. It bothers me, because I consider the marching to an “ever-closer” Europe a mistaken ambition, and in addition to it – I suppose – it is not in the interest of this country.

It seems to me that the prevailing American way of looking at the EU is based on a misunderstanding of the true substance of the European integration and especially on not taking into consideration the radical changes which have been going on in Europe in recent years.

The Americans probably believe – consciously or unconsciously – that the type of the European Union and its internal mechanisms do not matter. They underestimate the changes which occured in Europe after the Maastricht Treaty in 1992 and do not realize the implications of the EU Constitution in case it would had been accepted. The shifts from intergovernmentalism to supranationalism as well as the shifts from liberalizing, from removing various protectionist barriers to a massive introduction of regulation and harmonization are not seen or fully understood.

I am afraid that the Americans do not see the EU′s accelerating drive towards a social-democratic (more social than democratic) European superstate. That they do not see the EU′s protectionism, the EU′s legal and regulatory burdens on business, the EU′s irrational „competition policy“, the EU′s pensions and health care crisis, the costs of the European Single Currency, etc. All those things are for us, who live in Europe, very relevant. Even more for a country which is in a vulnerable post-transformation stage.

The Americans were also made to believe that the main problem of Europe even now – not 60 years ago – is the lack of peace. They probably believe – together with many Euronaivists or EU-apologists on the other side of the Atlantic – that the best way to achieve peace in Europe is by uniting it. I do not agree with it. To fight for peace – when war does not threaten – is a wrong excuse for building institutions which tend to restrain freedom, democracy and democratic accountability, not to speak about economic efficiency, enterpreneurship, competition.

The “good” unification in Europe process has its foreign policy dimension as well. Some Americans hope that the European political unification will diminish existing anti-Americanism of some very vocal and highly influential Europeans. This heroic assumption must be based on the belief in „New Europe“ (which probably means post-communist Central and Eastern Europe) and on the belief in its ability to change the European entrenched interests as well as the European political ambitions. I do not share this assumption.

The European unification can not be achieved in a relatively short period of time and without heavy costs. We feel, see and pay them.

There are no free lunches, as you know well. It took the United States more than a century and a civil war to achieve a similar goal.

To return to the Czech Republic, we went – in the last 16 years – through two parallel, but in many respects different processes. On the one hand we are – already and again – a normal European country. As compared to the communist era, it is a great achievement. As compared to the ideas of Milton Friedman, George Stigler, Gary Becker and many others here at the University of Chicago, it is not what we were dreaming about.

Václav Klaus, Graduate School of Business at University of Chicago, Chicago, 26.4.2006