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Systemic Transformation and Its Costs

English Pages, 13. 11. 1997

Mr. President, Ladies and Gentlemen, Distinguished guests,

I am extremely pleased and really honored by being awarded the Honorary Doctorate Degree at your University. I am aware of the distinguished list of predecessors who have achieved this recognition and I thank you for including me in this group. I take it as a personal award but, at the same time, I know that it is a form of recognition of my country´s achievements in the last several years after the breakdown of communism and of my modest role in this unrepeatable and therefore difficult transformation process, in the transition from communism to a free society.

I am not able to appreciate or evaluate the role of the University of Arizona in the academic life of your country but looking at it at a distance, looking at it from Prague, from the Czech Republic, from a former communist country, from a country  which has been undergoing in the last eight years the most radical transition to a free society and  market economy, this university is connected with the name of Gordon Tullock and his contribution to the Public Choice School of economic science.

Let me use - at least partly - this perspective for my today´s short address. I know that the Public Choice School was originally created for the analysis of the decision-making and of the behavior of the government and of other public authorities in a standard Western society but I can assure you that we - in the  communist era - understood immediately that it was even more relevant to the analysis of our own, very etatist, very „public“ and very quasi-collectivistic system where the role of the government  is both nominally and really much bigger than even in the most interventionist capitalist country. The irrationalities of the reliance  on  „public choice“  were  more  visible  than  in  your  country. 

We knew from our own experience that there is nothing like a genuine „public interest“  and especially  that  there is  nobody  who  could  represent  it.  We  saw  concrete individuals hidden behind the so called „public interest“ and we saw the partiality of those interests  pushed forward  by  various individuals or  regional or professional  groupings. They  had  no connection with or justification for anything that can be considered „public interest“. In the dark communist days it was almost a revelation and definitely an enormous help to come across the ideas of this school and to be able to use its arguments,  instruments and methodology. This approach de-mystified political decision-making processes, gave additional arguments for the explanation of the „government failure“ both in capitalism and in communism and sharpened the understanding of the irrationalities of  engineering methods when applied for the regulation of economic and social processes.

As I said,  the Public Choice School was of great importance for the criticism of  the old command economy (and society). It was, however, not less important in our search for the rational and easiest way to transform it, to create a free society and a market economy. We did not have the slightest confidence in the capacity of the government and its representatives to centrally plan and command the economy, nor did we believe in their capacity  to mastermind the transformation of such a society. We knew that the fundamental systemic change is in reality a very delicate mixture of intentions on the side of the politicians, and  spontaneity of the behavior of millions of free „players“ in the political and economic field. Therefore, we decided to privatize, deregulate and liberalize most of the activities which - in the past - were in  the  hands  of  the  state.

Communism  was  - as is well-known -  a  society  organized  around maximizing political benefits and not economic efficiency and we are still struggling with such a legacy. Although we are - after eight years of radical systemic transformation - still on our way, we are, at the same time , positively surprised how far and  how fast we have already moved compared to more than  forty years of communism.  Some of us are disappointed that the life  has not yet reached the smoothness and easiness of life here in Tuscon. As we see it now, we have to face a problem of enormous and necessarily unfulfilled expectations.  Especially now, when basic transformation measures  and  dislocations  had  already  been completed,  we feel that  the gap between expectations and reality - together  with  relative carelessness  of  the people about the fragility of the free  society - begins  to  negatively  dominate  the  atmosphere  in  the  country.

Contrary to  post-1989 dreams and unjustified declarations (mostly from abroad) there is no such thing as a free reform. To move from one institutional setting to another has its non-zero costs and these costs must be paid. They must be paid at home (with the exception of East Germany) and they must be paid by all - whether they were victims or exponents of communism.  The role of the rest of the world is in this respect close to zero and  the  marginal  product  of  foreign  aid  has  only  exceptionally  a  positive sign.

We have to patiently explain at home the difference between romantic and realistic views of politics. There are, in our society, residual beliefs in the ability of the state to behave paternalistically and to guarantee the happiness for everyone. This is a frame of mind, which has been, paradoxically, reinforced by the welfare state ideologies and methods in Western Europe (and America), and a huge list of deficiencies and imperfections - as compared to the countries which did not  undergo the same communist experiment - together with  a special  „catching-up flavor“  make  the  problem  more  pressing  than it would have been in  a  standard democratic society.  Powerful and very vocal pressure groups, which you know so well from your own country, started in a short time  to fill the gap between the government  and   the private sector  which  is  a  very  efficient  way to block both rational behavior of the government and rational systemic evolution.

The Public Choice School helped us to understand the importance of the clear definition of  the border between the private and the public and warned us against a „society of interest groups“ and against partialization and weakening of the state. We do want a limited but strong state, not an extensive (with fuzzy borders) and weak one. We, in Europe, have our disastrous experience with the consequences of the creeping  metamorphosis of a free society into a corporativist (or syndicalist) one. With such a background we look very carefully at the communitarian tendencies in your country and elsewhere. It is a mixed blessing and we feel its shortcomings.  The constant  threat  is  rooted  in  the fact that political processes in democracy allow organized interest groups to communicate their demands for government transfers and other forms of privileges  and  to capture the important benefits by expanding government.  And  this  is  very  dangerous.

There is no doubt that markets emerge wherever and whenever there exist opportunities  for individuals  to gain through exchange.  (That is the reason why  many explicit  but  especially  implicit  markets  existed  even in the communist  society.)  Markets appear whether we do want them or not  but for market activity to serve as the basis of general economic prosperity and of general human feelings of justice they must exist within a body of law. We know that the quality of  the rules of  the game  is  probably  the  most  significant determinate of economic  performance.    But   we  should   not   make   inappropriate  promises.

It is not  possible to passively import the rules  of  the game and  as  Douglas North  keeps stressing  „ many countries accepted U.S. Constitution but function quite differently“. It is, nevertheless, relatively easy to construct a formal legislation (of course, under the pressure of organized interest groups it is not quite so easy), it is, however, much more difficult to lay the foundations of its enforcement. We need working and performing institutions (courts, regulatory bodies, police, etc.) and we need informal rules (cultural traits and traditions) but they cannot be „introduced“ by decree during   the only partially and imperfectly organized transformation  process.  My  experience  tells  me  that  the interaction of formal rules with institutions which are supposed to enforce them and  with  dominant  informal rules  is  another critical factor affecting  transformation costs.

To summarize, there are many problems at this moment of transition from communism to a free society, and there is no chance to guarantee a smooth transition path in a politically and socially difficult, but highly democratic, pluralistic and open economy and society.  We are not in a „brave new world“ of perfect markets and of perfect governments.  Nevertheless,  we know we have   to complete the transition  as quickly as possible and to avoid paying  unnecessarily  high  price  for  it.

Václav Klaus, University of Arizona, Tucson, 13. November 1997