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Reflections on the Years between My Two Ditchley Park Conferences: The Czech Contradictory Developments

English Pages, 23. 6. 2006

1. My first Ditchley Park Conference was really in Ditchley Park. It was in October 1990, almost 16 years ago. When I look at it now, it was, in many respects, a different era.

2. We were – at that time – enjoying the first moments of our freedom. For millions of us it meant the reestablishment of personal liberty, the personal liberation from communism, from thousands of prohibitions, commands and directives, of big and small difficulties in our everyday life, of injustices and crimes. At the same time, it was the liberation of the whole country from the dictate from abroad. The reestablishment of the national sovereignty was a similarly important achievement as the personal freedom.

3. The task of the – then emerged or emerging – politicians (like me) was to use this historically unique opportunity for establishing full-fledged political democracy and maximally free and unconstrained market economy as well as to bring the country back into the family of free and prosperous nations.

4. In October 1990 we were four months after the first free elections. The borders were open and the people were free to move all over the world. Central planning and its institutions were abolished. Private property was legalized. Most of unefficient, irrational and only “quasisocial” subsidies were eliminated. Macroeconomic equilibrium – together with the public finances and money supply – were under control. We already had a plan, approved by the parliament, of “where to go and how to get there” called the Scenario for Economic Reform which was based on wholesale liberalization, deregulation and privatization.

A relatively small group of people was not afraid to say that the goal of our transformation was capitalism and standard parliamentary democracy. This, as well as the concept of how to get there, was not brought from outside. Its blueprint was prepared by ourselves. Its implementation was achieved 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 Czechs who wanted to get rid of the past.

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 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 the needed changes.

We faced many theoretically interesting and practically risky and untried challenges. We had to liberalize prices in the environment of a monopolistic structure of the economy and before privatization. We had to minimize inflation in the situation of excess aggregate demand and in the moment of a very sizeable loss of output.

We understood that the key to minimization of transformation costs was the radical opening-up of markets, cautious fiscal and monetary policies, as well as the “importing” of competition by liberalization of foreign trade and by radical devaluation of the currency. We accepted the – then dominant – doctrine of a fixed exchange rate as the only nominal anchor of a widely fluctuating transformation economy – even though I feared to do it.

We also 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.)

5. The “Czech way” had many similarities with the events in other transforming countries. It had, however, several differences. People like you followed it from different angles, places, countries, positions. Some of you with understanding, some with indifference, some perhaps even with envy. For some of you it was relevant, for others irrelevant. Some of you used the opportunity and participated in it in various capacities, some had and perhaps still have the feeling of not being sufficiently asked to come. It is, nevertheless, all over now.

6. As a result of the measures taken, a very specific “transition economy” was created. The economists have not yet analytically described it to my satisfaction. It could be characterized most appropriately by terms like new, inexperienced, without historic memory. It was an economy without deeply rooted and well-established institutions, without long-term personal ties, without sufficient degree of trust, customs, habits, an economy without firmly anchored informal rules.

Such economy was – I believe mistakenly – criticized by some brave and highbrow commentators and by some well-known pop stars of international consultancy for the lack of formal rules. This critique – if it was meant seriously – had to be based on misunderstanding of the logic and possibilities of legislation and institution formation in a truly democratic setting. It was probably forgotten or not sufficiently appreciated that the system of law and its institutions (as compared to any individual piece of legislation) is – in Hayekian terms – the result of spontaneous evolution of “human action” of millions of free citizens and not of “human design” of several brave reformers.

The task remains to conceptualize these issues – for potential future use.

7. The outcome of this historically unrepeatable mixture of construction and spontaneity was an economy with shallow markets, with heavy transaction costs, with fluctuating expectations-reality gaps, with rapidly changing income distributional patterns and with undisputable vulnerability. There were two main reasons for this vulnerability:

- the sharpness of political conflicts in a newly born democracy without mitigating experience of long time repeated political disputes and reversing coalitions, without special “brotherhoods” of well-established politicians, without mutual respect and “self-saving” of key political players;

- the almost innocent opening-up of the economy with a weak banking structure, with underdeveloped financial institutions, with inherited debts both in the real and financial sectors of the economy, with massive speculative attacks appearing whenever and wherever the chance for short-term profit arises.

8. Exactly these two incidents “happened” in our country around the year 1997. Some participants of this gathering know what I am talking about. It took us several years to consolidate the economy and start growing. It decelerated our catching up to the EU economic level. It increased the number of people hostile to democracy and market economy. It, however, satisfied several foreign investors because they acquired some Czech firms and banks unexpectedly cheaply. Even that is behind us and the era of “normal development and evolution” has restarted.

9. When I say normal, I mean normal in European terms. Is it really normal? Is our current development a moving in the right direction? I have to look at it with respect to two main changes achieved in our country after the fall of communism I mentioned at the beginning:

- the emergence of individual freedom (in political and economic fields) and

- the regaining of national sovereignty.

The historic dismantling of communism is undoubtedly over. Our gradual approaching the European Union, adjusting to its requirements and in 2004 formal entering into it was not a less important process of the era between my two Ditchley Park conferences. This has, however, been – in several respects – a process with much different characteristics than the first one. It brought us less freedom, less democracy, less sovereignty, more regulation, more of extensive government intervention.

I know that to say that is not the usual interpretation of the European integration process. What is usually seen or heard is the unstructured, unanalytical, almost naive pro-integrationist argumentation. It bothers me, because I consider the marching to an “ever-closer”, supranationalist, regulated and harmonized Europe a mistaken ambition and the misunderstanding of the true substance of European integration a dangerous intellectual defect.

The shift from intergovernmentalism to supranationalism, as well as the shift from liberalizing and removing of protectionist barriers, to a massive introduction of regulation and harmonization are not seen or fully understood. It brings heavy costs which we feel, see and pay.

10. To summarize, 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. It is not, however, what all of us were dreaming about.

Václav Klaus, 2006 IIF Ditchley Conference, Villa d´Este, Italy, June 23, 2006