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Transformation of a Former Communist Country: Seven Years After

English Pages, 30. 5. 1997

There had been - ex-ante, seven, eight years ago - many simplified propositions about the dismantling of communism and the formation of a free society and a market economy. As usually, there were optimists and pesimists among us. The first group underestimated the heritage of communism and overestimated the ability of some of us to mastermind such a complex task, the second group underestimated the strength of spontaneous activity of human beings when they are really free.

We were neither unconstrained optimists nor passive pessimists. We knew that the transformation of the whole economic, social and political system is necessarily a complicated and fragile mixture of intentions and spontaneity, a mixture of revolution and evolution, a mixture of continuity and discontinuity, a mixture of successes and failures, a mixture of widely applauded measures and of moves that are neither welcomed nor appreciated. We - in the Czech Republic - are continuously in and out of the past, we are on one hand positively surprised how far and how fast we have already moved compared to more than forty years of communism but on the other hand, we are (or some of our fellow-citizens are) negatively surprised that the life at home has not yet reached the smoothness and easiness of life in a country where the last episode of totalitarianism was more than half a century ago. It is possible to look at it from many angles and I decided to pick up one for this discussion. The gap between expectations and reality - described sometimes as a society’s coherence gap - has been between 1989 and now in the Czech Republic undergoing several drammatic switches. Let me say a few words about it. In some respect it is not a final analysis of the whole transformation process, it is an interim report.

In the first period, immediately after the unexpected collapse of communism in November 1989 (unexpected in its rapidity and deepness), the expectations-reality gap, let’s call it the e-r gap, either did not exist at all or was in the opposite direction (r>e). The suddenly achieved freedom was valued so highly that no clouds on the horizon were seen or envisaged. To put it in economic therminology, everyone assumed (and I have to admit that the politicians - for understandable reasons - did not warn sufficiently against it) that transformation does not have almost any costs, any transformation costs as we may call it, everyone assumed that the release of the latent, hidden, surpressed human energy after the elimination of all political, economic and bureaucratic barriers will bring benefits which will be bigger than costs connected with the dismantling of the old system. Such a happy state could not, of course, last too long and as we know it did not.

In the second period, the transformation costs became apparent and somebody had to bear them. In the communist era, we lived in an artificial and irrational economic world, in a world of non-economic, and therefore non-equilibrium prices, in a world of a non-viable economic (sectoral) structure, in a world of sheltered markets (inside COMECON) and of almost fully protected markets at home. The rapid adjustment to a standard economic structure was successfully composed of both contraction and expansion of various economic activities, but the contraction (I used to call it the transformation shake-out) was - especially at the beginning - much bigger than the simultaneous expansion of new activities. Between 1989 and 1993 the industrial output fell by 33,6%, the agricultural output by 23,5% and GDP by 21,4%. There was, at the same time, a very rapid growth of services (of the tertiary sector) but their contribution did not make up for the decline in the primary and secondary sectors.

As a result of it the e-r gap widened, but we succeeded in explaining and defending it. There were, of course, attempts to argue that a more gradual approach would have been less costly but we were - and are - convinced that the so-called gradualism would have produced new dangerous distortions. Not less important was the fact that the markets both at home and abroad were not „gradualistically“ waiting for such experiments and that something like a sophisticated gradualism could not have been realized in reality - in a complex, pluralistic, democratic, open society. There was, therefore, no other way out but to go ahead and to introduce all deregulation, liberalization and privatization measures as fast as possible. I stress adjectives complex, pluralistic, democratic, open, because I am convinced that in such a world there is no room for social engineering and that there is no one who has a mandate, knowledge and capacity to do it. I fully agree with Milton Friedman that „the error of supposing that the behavior of social organisms can be shaped at will is widespread. It is the fundamental error of most so-called reformers. It explains why they so often feel that the fault lies in the man, not the system“.

The third period, which in our case started in 1993 (and was partly post-phoned by the termination of the Czechoslovak Federation or, more precisely, of the Czechoslovak monetary union), was characterized by a relatively rapid GDP growth and by an apparent growth of real personal incomes (especially wages). In the period 1992-1996 the growth of real wages reached 32,3%. Because of low unemployment (around 3% only) we enjoyed a relative social peace. The e-r gap was lessened and as a result of it the ruling coalition succeeded twice in winning the parliamentary elections which is an achievement absolutely unique in the post-communist world. I have to admit, however, that the second elections were very narrow, which was mostly because they took place already at the beginning of the next period.

The fourth period started at the moment when basic transformation measures and dislocations had already been completed. Because of that, more or less standard problems of a free society and market-economy together with relative carelessnes on the side of citizens about the fragility of free society began to dominate the societal atmosphere. This is something what you know but there are some unpleasant, specific qualifications:

- as an inevitable heritage from the communist era there remains in such a country a huge list of unsatisfied demands. We have citizens waiting for the generous supply of various public goods, we have employees, especially in the public sector, waiting for generous benefits, salaries and working conditions - they want to be „in Europe“ already now. I am talking especially about professions like scientists, teachers, police and army personel, railway workers, etc. Their collectivistic organizations - trade unions or professional chambers - are in this period involved in the standard rent-seeking and by doing it they push for collectivistic solutions to their demands;

- our health-care system, which is partly privatized, which is excessively based on output or performance incentives (which leads inevitably to the oversupply of the health-care) and which is built on the overall compulsory health insurance, is running out of money and needs a radical systemic change which is, however, difficult to realize against powerful vested interests, both on the side of patients and doctors;

- government bureaucracy is slower in understanding all the magic and all the fallacies of the market mechanism than its individual participants at the microlevel. As a result of it, they are able to use or misuse all the deficiencies of the still unmature, shallow markets and the government is - necessarily - blamed for that;

- we have opened ourselves to the rest of the world, especially to the European Union, more than the rest of the world to us. First, it brings about difficult problems with our balance of trade and with the current account of the balance of payments. Second, it complicates the life of some of our industries (rapidly growing imports of heavily subsidized agricultural and food products from Europe, increasing imports of extensively export-promoted products of the European manufacturing sector, the impact of foreign chains of department stores with their biased products structure, etc.);

- new political, social and economic structure as regards its organization and institutionalization is more or less complete. The government and the private sector are, however, squeezed between powerful and very vocal pressure groups which block both rational behaviour of the government and rational systemic evolution. These pressure groups - together with the left-wing political opposition - succeeded in converting the general atmosphere in the country and in widening the e-r gap.

Looking into the future, the fifth period - which has just started - will be characterized either by the continuation of existing consistent transformation policies and the subsequent reversal of the e-r gap or by a fall into the blind ally of inconsistency and incoherence, of populism and empty symbolism with all their well-known consequences.

I hope we will keep on moving ahead.

Václav Klaus, Preliminary Draft of a lecture given at The Bologna Center of The Johns Hopkins University, Italy , 30 May 1997.