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The Problems of a Newly Born Democracy and Market Economy

English Pages, 12. 5. 2000

With the advantage of already 10 years´ experience, we can make first generalizations about the collapse of communism and the birth of democratic and free society.

We can make a strong point now that open, pluralistic and democratic society has been - at least in my country - established.

All difficult, inevitable and very risky transformation measures have been done by democratically formed political structures, at least in the Central and East European region, where political pluralism, parliamentary democracy, fierce competition and rivalry of political parties, unconstrained and, therefore, absolute freedom of the media, etc. fully dominate (which was probably not the case when we move more to the East or South).

It implies that transition was not masterminded from above, that it was not dictated by one autocratic politician or another, that it was the product of a very specific and complicated mixture of intentions and spontaneity, of design and of action, of planned and unplanned events. There are two groups of players in the game - the "reformers" and the general public (with all its heterogenity). It is a mistake to assume that the results are fully in the hands of the first group.

It is easy to criticize the outcomes of such an evolutionary and uncontrolled process from outside (as uninvolved observers), from abstract theoretical positions, from absolutistic ideological principles, but the transition was not an excercise in applied economics, it was “real life”.

The task of politicians was to bring a clear and strong vision of where to go, to come with a viable transformation strategy, to be able to administer the mechanics of transition and to get sufficient support for transition and for its basic building blocks. Some of us succeeded, some of us not. Our success or failure, however, dramatically influenced the level of transformation.

The politicians had to win or rehabilitate the role of political parties (the word “party” was totally discredited in the communist era) and not to accept the third way thinking based on loose, fuzzy organisations like civic movements, national fronts for or against something or somebody (not to speak about Russia Unite, Russia’s choice, Jabloko, etc.). My experience tells me that there is a strong correlation between the presence or absence of a standard political structure (with well-defined political parties) and the success of transition.

A very important task of politicians during the whole period was to fight the romantic or pseudoromantic point of view based on two dangerous ideas:

1. it is possible (when changing society) to look for new, unknown, untried solutions, to use the collapse of communism for creating another utopia;

2. it is possible to get something for nothing, there is such thing as a free reform, there are no transformation costs.

I believe that the last ten years demonstrated that both ideas were and are wrong, but we have to admit that it has not been fully accepted either in the postcommunist world or in the rest of the world. Because of that the expectations–reality gap (E-R gap) has been - surprisingly - steadily growing, not narrowing. Much has been accomplished in this past decade. We have witnessed an enormous change in the basic substance of life in most of the transition countries, but the expectations have been growing even faster.

Serious discussion of the political aspects of transition would require to deal with several other important, and definitely non-trivial issues. I will mention some of them:

1. Transition is a sequence of policy decisions, not a once-for-all policy change (therefore, the debate about gradualism or schock-therapy was wrong);

2. Transition is based on human choices (influenced by ideas, prejudices, dreams and interests), not on scientific knowledge;

3. Transition brings democracy, but more democracy typically enhances the power of interest groups which blocks further reforms;

4. During transition from communism the first problem was to concentrate on solving the dichotomy “oppression vs. freedom” whereas the no less important dichotomy “anarchy vs. order” was - especially in the first period - usually neglected or at least underestimated. To put it differently, freedom was prefered to order and the institution formation was - not neglected, but - not pushed to the forefront. As a result of it, the inherited low level of trust in institutions was not radically changed and remains to be low. When I say that I do not subscribe to the currently fashionable idea that there is something like first and second generation reforms, where the first generation reforms contain liberalization and deregulation together with macroeconomic stability, whereas the second generation reforms deal with "transparency in government and financial activities", good governance, sound legal, regulatory, and supervisory frameworks, and fiscal policy sensitive to the social and economic needs and situation of its citizens" (as it was recently defined at the IMF and World Bank conference in Washington). As one who was responsible for the transition I have to say that we have been always aware of both aspects of transition;

5. Another critical factor affecting transformation costs is the interaction of formal vs. informal rules and the gap between rules and their implementation;

6. Transition is "a homework", it must be done at home, everyone must be a part of it, the most widespread domestic participation is crucial. The blueprint of the reform cannot be imported, the local knowledge (and participation and experimentation) is unavoidable.

In the economic field it was necessary

- to minimize the inevitable economic decline which had to follow the fundamentally changed economic environment (it was partly the result of the transformation strategy itself, partly the unintended consequence of the changed international division of labor and of the dramatically increased globalization of markets);

- to eliminate the inherited excess demand (or forced savings) at the moment of price liberalization without initiating galloping inflation or even hyperinflation;

- to set the exchange rate at a level which would have made it possible to liberalize foreign trade without creating a very risky external imbalance which could be easily lead to instability and crisis;

- to liberalize prices and foreign trade without creating unbearable social conditions and short-term economic disruptions;

- to deregulate markets with a very imperfect market structure (without waiting for perfect markets);

- to privatize state ownership rapidly, efficiently, with domestic participation and in a socially tolerable way;

- to change institutions, rules and legislation efficiently but in a democratic way.

Transition countries succeeded in the above-mentioned tasks with mixed results.

It is difficult to say only a few words about privatization but at least two remarks are necessary:

One - complicated, but relatively - easy - task is to privatize individual firms "forgotten" in the state hands in a standard market economy, which has all necessary institutions (and domestic capital). This is what I call classical privatization.

Our task was different. We had to privatize the whole economy, where everything (starting from the smallest hairdresser and grocery store) was in the state hands. There was no market economy, no capital markets, no domestic capital. This task I call transformation privatization. We had to introduce simple procedures (now easily criticized), to let maximum citizens of the country to be involved and to prefer the rapid transfer of property from government hands to higher privatization revenues. That was the reasoning behind our idea of voucher privatization.

Václav Klaus, 12. 5. 2000