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Introductory Remarks at the European Banking & Financial Forum 1997

English Pages, 26. 3. 1997

Ladies and Gentlemen,

I am very pleased that I can see all of you in Prague and I am pleased to make again my introductory speech at this forum which already has its good tradition. We are glad that well-known politicians, bankers, businessmen and representatives of important international institutions are here in Prague and that we have - thanks to that - an opportunity to discuss with them the issues of economic transformation of the post-communist world and especially its financial and monetary side. I am ready to stay in this field this morning and I will not try to discuss more general issues of the economic transformation as it was indicated in the conference program.

Each additional year gives us new information, new experience and I will, therefore, mention several topics now where I feel some shift in our opinion or in our understanding. I selected the following five topics:

1. From December 1990 till February 1996 we, in this country, lived in a world of a fixed exchange rate regime, with a very small fluctuation band. I remember that in the last days and nights before the introduction of the fixed exchange rate (which was accompanyied by sharp devaluation of the crown) I was really afraid of the fixed rate. I have to admit now that at that time I more or less accepted the dominant view of the time as well as the IMF’s pressure. Several months after its introduction already and especially now, looking back, I have to admit that it was a good decision. Nevertheless, studying the current economic literature, I realize that fixed exchange rate is not fashionable and that it even becomes increasingly unpopular. Standard argument, based mainly on recent Latin American experience, says that fixed rates do not necessarily represent a critical component of a successful stabilization program. I agree but on condition that we talk about „stabilization programs“ only. In our case, however, we did not go through the typical stabilization program, we had to achieve more, we had to make the comprehensive transformation of the whole economic system, not just a narrower task of macroeconomic stabilization. And I would strongly argue that the transformation program needs such a nominal anchor whereas stabilization program can probably proceed without it.

2. The abandonment of the fixed exchange rate regime led in our case to an important change. Monetary policy of the central bank turned from a passive policy into an active one. I have to stress that our central bankers dreamt about such a possibility and I have to say that they made use of it very soon. At the moment of supposedly very stubborn inflation (even if at a relatively low level of 8-9% a year) and at the moment of increasing balance of payments difficulties, they introduced a series of restrictive measures. They wanted to bring down the aggregate demand and to disinflate as well as to fight the increasing imbalance in the current account but - as we see it now - the impact upon aggregate supply was even stronger. The economic growth slightly slowed down and the external imbalance probably even deepened. The tentative lesson is following: in the short-run monetary policy change in the downward direction - given the structural parametres of the system - influences more supply than demand.

3. The radical opening of the economy was considered by us as one of the crucial preconditions for the success of the market economy as well as of the market economy reform. We see, however, that the combination of inevitably weak, thin or shallow domestic markets, of „emerging markets“ as it is often called now, with high degree of foreign trade liberalization, leads to the shift of domestic demand from goods produced at home to imports. The growing trade imbalance is a logical outcome of it and we know that there is no easy way how to change it. We can very easily imagine the use of some administrative restrictions but this is what we do not intend to do. The problem, however, remains.

4. Privatization in a country without domestic capital, not to speak about efficient capital markets, is extremely difficult and with the benefit of hindsight we can suggest what should be avoided but I am afraid we do not have simple instructions what should be done. I am still convinced that the voucher privatization, invented in this country, was a success and a catalyst of the whole transformation process. I remember that some of us tried to go directly from unreconstructed and, therefore, unweakened state ownership to a private one, with the ambition to minimize the time in which the firms are in a loose „commercionalized“ state of the so-called state or semi-state joint stock companies. I have to admit that we did not succeed in making this interim stage sufficiently short and I know that exactly in this interim stage, which we called the stage of pre-privatization agony, many productive real as well as financial assets were lost. This is something what the future privatizing countries should avoid.

5. We started our transformation with three or four commercial banks and without any other financial institution. As a result, our central bank was very liberal in granting licences to new commercial banks and our ministry of finance was similarly generous in granting licences to new firms which had ambitions to operate in capital markets. It was very difficult - at the beginning - to know how many banks and other financial institutions represent the optimal number. We have too many banks and too many investment funds now and we also know that not all of them function perfectly or are in the best possible hands. Again, I have to argue that to stop the spontaneous emergence of agents acting in financial and capital markets is very dubious because you are immediately accused of illiberal or competition-not-supporting approach. We are searching for new forms of regulation but I disagree with those critics, mostly foreigners, who look at the existing quality of our capital markets and are surprised that they do not equal Wall Street, City of London or any other well-established Western financial centre yet. Their high-brow attitude and their absolutist, almost doctrinal phraseology is something what does not help much. The maturing of capital markets and suitable form and size of their regulation remain to be our imminent task and I can assure you that we are aware of it.

I know that there are many other topics. To discuss them is usually not the task for prime ministers. I only hope that my remarks were directed at the topics you intend to discuss here in the next two days and if they do not correspond with your ideas fully, I hope that they will at least motivate you to explicitly oppose them. I would be satisfied if either one case would be true.

Thank you for your attention.

Václav Klaus, Introductory Remarks at the European Banking & Financial Forum 1997, Prague, 26. 3. 1997.