Czech transition to the free market

Of the former Soviet bloc nations, the Czech Republic has made the most progress towards tranforming its economy into a free market, and became the only nation in the world whose Prime Minister was an Austrian school economist. "Coincidentally" it is also the most prosperous of formerly communist nations as well as the one with the most vibrant culture.

How to move towards freedom

The following remarks were made by Czech Prime Minister Vaclav Klaus on October 15, 1993 (or possibly 1994), in a speech at the Heritage Foundation.

I believe that the Czech Republic has already crossed the Rubicon dividing the old and the new regime. We may become the proof that the transformation from communism to a free society can be realized.

The systemic transformation is not an exercise in applied economics or in applied political science; it is a process which involves human beings, which affects their day-to-day life, which creates new groups of gainers and losers, which changes the relative political and economic strength and standing of different socio-economic groups and which, therefore, destroys the original political, social and economic equilibrium.

1. To be successful, the political leaders must formulate and sell to the citizens of the country a positive vision of a future society. The first task is its formulation; the vision must be positive (not just a negative one); it must be straight-forward; it must motivate; it must speak to the hearts of the men and women who spent most of their lives in the spiritually empty communist regime. The second task, to sell the vision, is much more complicated. It requires to address the people, to argue, to explain, to defend; it requires permanent campaigning. It requires more than a good communication system, more than sophisticated information technology, more than free and independent mass media. It requires the formation of standard political parties because without them the politicians have no real power base.

2. The necessary set of reform steps includes both changes of institutions and changes of behavioral and regulatory rules. Institutional changes take time, changes of rules, however, can and must be done very fast. Much of the disagreement about the speed of transformation (shock-therapy or gradualism) can be dispelled if a proper distinction is made between the speed of those two conceptually different transformation tasks.

3. Such a fundamental change of an entire society cannot be dictated by a priori, prearranged procedures. Reform blueprints must be loose, unpretentious and flexible. The dreams of social engineers of all ideological colors to organize or to mastermind the whole process of a systemic transformation in a rigid way are false, misleading, and dangerous. It must be accepted -- as an important transformation theorem -- that it is impossible to centrally plan the origin and rise of a free society and of a market economy.

4. The reforms must be bold, courageous, determined, and, therefore, painful, because

   • Economic activities based on subsidized prices, on artificially created and now nonexistent demands, and on sheltered markets must cease to exist;
   • Once-and-for-all price jump after price deregulation is unavoidable;
   • Drastic devaluation, inevitable to be introduced before liberalization of foreign trade, shifts the exchange rate very far below the purchasing power parity;
   • Income and property disparities grow to an unprecedented level, etc.

The costs the people have to bear must be widely shared, otherwise the fragile political support is lost. Telling the truth, not promising things which cannot be realized, and guarding credibility of reform programs and of politicians who realize them, are absolute imperatives.

The Reality of Compromise

In June 1996 elections, Klaus' free-market Civic Democratic Party (ODS) fell two seats short of a majority in the Czech parliament. The second-place Social Democrats, a traditional European welfare state party, will slow down the liberalization of the Czech economy.

The four major Czech parties accepted an agreement in which the Social Democrats lead parliament in return for support of a minority government of the center-right coalition of the other parties. Klaus will remain prime minister.

The Social Democrats oppose privatization of state-owned utility and transportation networks, and want more government involvement in pensions, health care and education.

Sources include June 7, 1996, Reuter Information Service article "New Czech parliament term to begin June 17."