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Economic (and Political) Transformation in Central and Eastern Europe: The Czech Experience

English Pages, 2. 12. 2017

Many thanks for the invitation, my thanks for suggesting an interesting and still highly relevant topic for my today´s presentation, many thanks for bringing me to Forli. I have never been here.

I am coming from the Czech Republic which – two weeks ago – celebrated the 28^th anniversary of the fall of communism. I stress this already non-negligible number of years because I know that the students assembled here were born several years after this historic moment. For me, however, it is not a prehistory, it is a part of my life.

Let me say a few words about it as someone who has been since the fall of communism in charge of the political and economic transformation of the country – first as the Minister of Finance, then as the Prime Minister, as the Chairman of the Parliament, as the President of the Czech Republic, as a founder and chairman of a right of centre political party. There are, I do believe some interesting specifics of our case which should be mentioned:

- the Czech Republic is both geographically and culturally the most Western from Central and East European countries;

- our country was in a unique position as the only politically and economically developed one prior to its communist era;

- and, finally, we have spent the last 13 years in the European Union, which we find as another problematic, artificially created construct, based on aprioristic and constructivist ideas.

We wanted – after half a century of communism and of our undesired and involuntary belonging to the Soviet Empire – to become a free, independent and sovereign nation. This goal was achieved quite rapidly but our situation has begun slowly changing as a consequence of our EU membership. I will return to it later.

My today´s presentation has a title “Economic (and Political) Transformation in Central and Eastern Europe: The Czech Experience”. What we went through after the fall of communism was not just an economic change. It was a fundamental transformation of the whole political, economic and social system.

We feel obliged to preserve a correct understanding of this unique and unrepeatable process. It is not easy. We are already more than one generation away from it. Let me start with a short summing up of thoughts and attitudes of the Czech reformers in the moment of the fall of communism:

1. We were convinced then – and are convinced now – of the necessity of a total and unconditional liquidation of the communist political and economic system. We wanted a fundamental systemic change, not just a regime switch. We explicitly proclaimed that we wanted capitalism. We resolutely refused all dreams about the so called “third ways” (or about a possible and desirable convergence of existing economic and political systems). This ambition of ours was not fully understood and not entirely positively welcomed in Western Europe at that time. Europe already started to move to a new system which we see in a much more mature form now.

2. We knew that a deep systemic change is not an exercise in applied economics. It was something very real. It was not a game of chess. It was a process affecting millions of people with their dreams and fears, with their vested interests, prejudices, ambitions, fates. In addition to it, we had no handbook, prepared in advance, which could tell us how to do it. The whole transformation process was necessarily an ad hoc mixture of constructivism and spontaneous evolution. All theoretical recommendations about optimal sequencing of reform measures were very quickly found inapplicable.

3. I would like to repeat that we wanted to get rid of the communist system. The imperative was to avoid a non-transformation, a slow movement to nowhere, the victory of the status quo. Some of you might have heard about a dispute between “gradualism” and “shock-therapy”. We did not believe that gradualism was a feasible reform strategy (in a politically free society) and we, symmetrically, disagreed with the term “shock therapy”. This is not an analytical term. It was and is a political accusation. It was necessary to make this radical change as fast as possible, but we didn´t want to shock anyone. On the contrary, we needed a maximum of cooperation with the citizens of our country, we needed their support, otherwise the transformation wouldn´t have been realizable.

4. We felt that the transformation project had to be ours, based on our ideas and on our realities. We tried to find our own “Czech way” and to give the people a chance to be the active players in the game, not just passive observers. We did not consider ourselves representatives of international institutions and we did not feel any necessity to please them. I have in mind especially the IMF and the World Bank.

5. We considered both the economic and political reforms interconnected and indivisible. To separate them à la China was in Europe, especially in Central Europe, impossible. The whole concept of gradualism was (and is) based on the belief in the possibility of a detailed orchestrating of reforms. It was not possible to stop the spontaneously started processes. It would have been possible only with the absence of political freedom which was not our case. We opened the entry into the political system right away and organized free elections as early as six months after the Velvet Revolution (dopo la Rivoluzione di velluto). Fully-fledged political democracy has been formed in our country already at that very moment.

6. There were, of course, inevitable steps and economic “rules” which we followed and respected:

- a radical restructuring of government institutions started immediately – some were abolished, the role of others was substantially changed;

- a radical liberalization, deregulation and desubsidization of the economy was done very rapidly;

- we were aware of the enormous importance of macroeconomic stability for the success of transformation. Due to it, we carried out very cautious monetary and fiscal policies. Our rate of inflation was much lower than in all other transforming countries;

- we knew that liberalizing prices (after 40 years of inflexible, rigid, administered prices) without a parallel liberalization of foreign trade would have been a tragic mistake (especially in a small economy). We did it in the same moment;

- a few days before the price and foreign trade liberalization we carried out a substantial devaluation of the Czechoslovak crown which more or less accepted the level of the existing black market exchange rate. It – overnight – restored the economic equilibrium;

- we, as true liberals, wanted to introduce a flexible exchange rate regime as soon as possible but we – at the same time – understood the role of the fixed exchange rate as a much needed anchor when everything else was rapidly moving. It proved to be a good idea.

7. The decisive part of the transformation process was privatization. Our approach was based on certain non-intuitive ideas, which are still now – especially in the West – not sufficiently understood:

- our goal was to privatize practically all the existing state-owned firms, not just to rely on the setting up of new firms on “green fields”;

- because of the lack of domestic capital (which did not exist in the communist era) and because of the very limited number of serious foreign investors, the firms had to be privatized at a low price. This idea led us to the well-known concept of the “voucher privatization”, which played in our privatization program an important role. This idea was our invention;

- fast privatization was considered to be the best contribution to the much needed restructuring of non-functioning, inefficient, obsolete firms we inherited from the communist era (we did not believe in the ability of the government to restructure the firms).

From the very beginning, the Czech reformers knew that they had to privatize the economy they inherited as soon and as fast as possible. We did not have any great interest in the size of privatization proceeds (which proved to be difficult to accept for Western advisors, consultants and investment bankers who had a different aim – they wanted to maximize their own revenues).

8. Transformation is a process, which inevitably takes time. There are many aspects and dimensions of it but we understood that it is necessary to introduce the critical mass of reform measures at one moment. This was in our case achieved in the first years of the 1990s. In 1994, five years after our Velvet revolution, we were – as the first post-communist country – accepted as a member state of the OECD, of this club of the most developed industrial countries. It was a symbolic moment for us.

9. In the second half of the 1990s we started our approaching the EU. It was me as the Prime minister who in January 1996 brought the application letter to Rome – into the hands of the Italian Prime Minister Dini because Italy had a rotating EU presidency at that moment. It was me who in 2003 as the President of the Czech Republic signed in Athens the EU Accession Treaty. Our EU membership has – as everything else – its costs and benefits. To be frank, we are not sure that the benefits have exceeded the costs which isn´t, of course, a politically correct statement. Mr. Juncker wouldn´t be happy to hear it. But we are good friends and he knows very well that this is my long-term position.

We – undoubtedly – live in a different and much better world now than 28 years ago but we are – in many respects – disappointed. The beginning was promising. It is not so rosy now. In the last couple of years, we have been moving away from standard politics to post-political, post-democratic arrangements, from authentic, ideologically well-defined political parties to ad hoc political projects, from democracy to post-democracy, from free markets to highly regulated markets.

As I said, we privatized, liberalized, deregulated and desubsidised the rigid communist economy radically and without unnecessary delays. However, in the last decode we started a reverse process. Our economy is more regulated and subsidized (and harmonized and standardized) now than it was the case a decade or two ago. The increasingly destructive weakening of the nation-state by the European Union (and its ideology) and the relatively fast moving towards global governance fundamentally undermined our sovereignty.

It is not easy to understand the contemporary version of the European integration project properly. The original – less ambitious and less detrimental – integration project of a friendly cooperation of European sovereign states, which originated in the 1950s, has been in the last two-three decades transformed into a centralized, bureaucratic, excessively standardized and harmonized project aiming at the unification of the whole continent. We see in it many features of the system we abandoned 28 years ago. The methodological difference between the terms “integration” and “unification” is absolutely crucial for me.

We feel that the EU membership brings us back from capitalism to a modern form of European socialism, to an administratively organized society. It may sound too harsh, but I always justify this stance of mine by saying that living in communism sharpened our eyes. Not everyone in Europe has had such an experience.

The currently prevailing EU ideology undermines the traditional, historically proven pillars of European society:

- the nation state – by favouring regions to states and by attacking a nation state as a basis for nationalism (and, therefore, for wars);

- the family – by promoting genderism and feminism, by proposing all kinds of registered partnerships and same-sex marriages, by questioning the natural and historically proven sexual orientation of men and women;

- the man – by trying to create a new European man, homo bruxellarum, by artificially mixing citizens of European countries and – especially in the recent era – by promoting and organizing the mass migration of individuals without European roots into Europe.

Our communist past motivates us to defend these historic pillars of European society. Without them there is no good future for us.

Thank you for your attention.

Václav Klaus, Lecture at the University of Bologna, School of Political Science-Forlì Campus, Forli, Italy, December 1, 2017.