Hlavní strana » English Pages » The International Leontief…

The International Leontief Medal for Contribution to Economic Reforms: Fundamental Systemic Change Is not an Exercise in Applied Economics

English Pages, 15. 2. 2014

Mrs. Director-General, Ladies and Gentlemen,

Thank you for bringing me back to St. Petersburg. Last time I was here as President of the Czech Republic attending the 300^th anniversary of the founding of your great city. Thank you for awarding me with the International Leontief Medal which was given to several important Russian and international scholars, some of them my good friends, in the last couple of years. I agree with the views of most of them, with some of them, I have to confess, we were involved in friendly polemics. I do appreciate your award very much.

The award is connected with the name of one of the last century’s great economists, the Nobel Prize winner Wassily Leontief, who grew up and spent his undergraduate studies here in Saint Petersburg. Until recently, I erroneously believed that he even started to work here in Russia, and due to that experience was able to see the insurmountable problems of the early central planners to approximate the flows of goods among various economic sectors which finally led to his model of input-output analysis. Now I know that he came to that topic later, after his studies in Germany.

It should be mentioned that I myself have never worked in this field and, moreover, that I have never sufficiently understood and appreciated this field of economic studies. My generation of economists which came into the world of economics half a century ago was always more interested in the debates about economic systems and economic reforms than about methods how to improve the work of planners or other decision-makers in governments. The Czechoslovak economic reform in the 1960s when I started to look around was more about markets than about plans (or an inter-industry sectoral analysis).

I had two – for me important – contacts with Wassily Leontief, one personal, one literary. In the spring of 1969, I spent one semester as a teaching assistant at Cornell University in the United States. Prof. Leontief gave a public lecture there (with hundreds of students attentively listening) and, afterwards, the university president organized a lunch for a small group of people, including me. Prof. Leontief´s lecture was devoted to his input-output analysis and to his, then undergoing attempts to use it for the description of the whole world economy. The lunch debate was more down to earth but I did not get the feeling that he was much interested in the issues of economic systems and economic reforms.

During the Prague Spring era, the Czechoslovak Academy of Sciences decided to translate and publish the well-known, huge, authoritative, two-volumes “Survey of Contemporary Economics” written by 23 highly regarded American economists, including Wassily Leontief. I got the very ungrateful and insufficiently appreciable role, almost “a mission impossible”, to coordinate the translation of 23 Czech translators in a situation of practically non-existent Czech terminology because our (and yours) Marxist “political economy” was something else than standard “economics”. I spent a lot of time working on it. Leontief was selected to write a piece on econometrics which – I am afraid – did not belong to his main academic interests. The book was finally published in Czech with ten years delay under the title “Survey of Contemporary Bourgeois Economics”. The book was, of course, considered ideologically wrong.

Let me repeat that I am really honored to receive the award for my contribution to economic reforms. It is a – more or less – additional or supplementary award for me. My main “reward” was when I got a chance to be in important public roles in Czechoslovakia and then in the Czech Republic as minister of finance and as prime minister in the years immediately after the fall of communism. It gave me a chance to prepare and implement a fundamental systemic change, which we used to call transformation. Communist regime was a world of permanent “reforms” or quasi-reforms (I suppose you had the same experience) and that was the reason why we rejected the term reform when we wanted to speak about a real change. Reform is something which is done inside a system, without changing it.

I used the expressions “to prepare and implement” the systemic change which is, however, an immodest overstatement. You cannot change a complex system. Any such change is – as I tried to explain many times in the past – a mixture of spontaneous evolution and of political constructivism where political leaders (and their academic advisors) represent just one part of the whole process. This is, I claim, an important, yet insufficiently understood point. The political change in our part of the world preceded the economic changes. The millions of finally free people, fascinated by this new experience, wanted to live without being organized and controlled by anyone and there was no way of stopping them to do so, at least in my country.

I hope we all know that the overall systemic change is not an exercise in applied economics. The politicians, former academicians like me, understood very quickly that all the sophisticated theories of the optimal sequencing of reform measures were practically of no use.

This simple truth had provoked many both friendly and unfriendly discussions and criticisms which were inevitable, much needed, but often politically misused – in your country and in my country as well. I will mention two important topics:

- the macroeconomic dilemma: the liberalization of prices and foreign trade vs. the creation of a stable macroeconomic framework in advance;

- the institutional dilemma: the liberalization, deregulation, privatization prior to or after having a solidly built institutional framework?

For the majority of economists, the first issue was conceptually relatively simple. They knew that liberalizing prices and foreign trade without reaching a certain degree of macroeconomic equilibrium would bring about galloping inflation or hyperinflation together with huge balance of payments problems. Some of us knew it well enough, some of us even succeeded to avoid doing it in a wrong sequence. My country experienced the lowest inflation because of the lower level of macro-disequilibrium we inherited from the past and because of the very cautious monetary and fiscal policies we implemented immediately after the fall of communism. Our first post-communist state budget – for the year 1990 – was a surplus budget and I put a lot of my political capital into pushing it through the parliament.

The second issue was and still is more contested. Our various, sometimes very loud critics – the academic, ivory tower economists, especially the adherents of all variants of the institutional school; the political opponents of all colors and of all kinds of prejudices against the radical and fundamental systemic change; the believers in all kinds of third ways and in the possibility of efficient and productive masterminding of a complex human society from above – for very different and contradictory reasons argued that it was possible to postpone the quickly evolving spontaneous processes until the government delivers “efficient” institutional framework. They wanted to have the so called rule of law with all the necessary legislation and law enforcing institutions first and only after that to let the market economy go ahead. This was, of course, a total nonsense, and it should be stressed very loudly, at least now and here.

Our critics did not see or did not want to see that there were transformation measures with objectively different time requirements and that their introduction and implementation couldn’t coincide in time. The institutional framework and the rule of law have to evolve, they can’t be “introduced”. Bringing them to perfection takes years or decades, not days or weeks. Patronizing us in this respect was a very insensitive and thoughtless behaviour on the side of some of our Western colleagues and of some of our domestic opponents who wanted to stay in the role of detached commentators or uninvolved observers. That was a very easy and comfortable position.

I am repeatedly surprised that we still come across a politically tempting but in reality non-existent dilemma: shock therapy vs. gradualism. All of us who were involved in the real process of transformation (who were not just commenting on it or criticizing it) have been arguing for years that such a choice had never existed. It was necessary at one moment to carry out a critical mass of reform measures in order to send a strong signal to the citizens of our countries that we were serious and fully determined to change the country. After that, the only relevant rule was “to implement any measure which was prepared whenever there was an opportunity to do it”. Criticizing almost all authentic reformers of pursuing “shock therapy” is an unfair political accusation. Gradualism is not a program. It is – and was – a comfortable way to avoid real transformation. It is evidently unproductive to continue such disputes – permanently repeated by people like Joseph Stiglitz and his “true believers”.

There is nothing like a “shock therapy”. What can be seen, in many cases very clearly, is a “wrong therapy”:

- liberalization of prices without having the macroeconomic situation under control;

- liberalization of prices and foreign trade separately, not in the same moment;

- privatizing the economy too late, to make the so called spontaneous privatization possible (into the hands of the old nomenclature), to sell the country cheaply abroad, etc.

I know that not everything was done correctly in any country, including your country. It seems to me that in the 1990s, Russia was weakened by the absence of a widely shared and easily comprehensible transformation vision which would have given the people an elementary orientation and hope for the future. People like me also observed the lack of macroeconomic and money supply control which led to a very high and hence destabilizing inflation. I also saw a problem in the inability to set up genuine political parties and, therefore, an authentic pluralistic political system. I do not have, however, the slightest ambitions to develop these points here in front of people who lived here at that time and know much more about it.

I suppose the Leontief medal is about economic reforms in general, not just about the unique and unrepeatable reforms after the fall of communism. There is permanently a need for far-reaching reforms in many parts of the world. Especially Europe needs not only a reform, but a deep systemic change now. The current European problems are not accidental. They were also not imported from abroad. They were not created by the irresponsible developments in Greece or any other country of the European South. They were “self-inflicted”.

They have a systemic origin in two meanings. The European economic and social system, the so called “soziale Marktwirtschaft”, does not make economic growth possible. The centralistic and bureaucratic European integration model, based on the idea of an “ever-closer Europe”, destroys traditional diversity and one crucial European value – democracy. That’s the reason why Europe has to do something we did 20 years ago – it has to change the system. Cosmetic changes, currently suggested and implemented by the European authorities, remind me of Leonid Brezhnev’s reforms here in the Soviet Union´s era. Europe needs a revolution, hopefully a Velvet one. I wish you would find successful European reformers for your future Leontief medals. It may not be an easy task.

Václav Klaus, Speech at the Rewarding Ceremony, Leontief Centre, St. Petersburg, Russia, February 15, 2014.