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The Czech Republic in Europe at the Turn of the Century

English Pages, 26. 9. 1996

Ladies and Gentlemen,

Thank you for inviting me to come here and for giving me the opportunity to share with you some of my ideas about my country, about the post-communist world, and, implicitly, about Europe and your country as well. I will of course use my experience, both from the communist era and from the transition years as my main perspective.

Almost seven years after the so-called Velvet Revolution, the Czech Republic has completed its basic transformation from a communist society to a free society based on a pluralistic political system and a free market economy. The relative success of the transformation process in the Czech Republic was made possible by:

- a clear vision of a society we wanted to establish;

- the capability of political leaders who were suddenly and unexpectedly put into their positions after the collapse of communism, to prepare and implement pragmatic and realizable transformation strategy;

- the ability of political leaders to gather sufficient public support for the measures which were often painful and therefore not popular.

The easiest part of the whole process was the political transformation. It was put in place through a simple and rapid liberalization step: through the introduction of free entry into the political market. As a result, almost overnight new political entities started to emerge. They started to formulate their political programs and to establish their local branches throughout the whole country. They began their fierce and, in principle, healthy political infightings. Nothing else was necessary. What followed naturally was a pure, spontaneous evolution. After the initial extreme atomization of the political spectrum (with more than 100 political parties or quasi-parties at one moment), the more or less standard spectrum of political parties with clearly defined ideological positions has gradually been created. To a large extent the current political structure of the Czech Republic resembles those of Western-European style. This new structure led to coalition governments and in spite of the relative weakening of the ruling coalition in the recent parliamentary elections, the Czech Government remains as the only right-of-center government of the post-communist world.

The social transformation took a longer time. It started with the abolishing of the most visible aspects of the communist paternalistic system, the subsidized food prices. It continued with the radical liberalization of prices which were during fourty years under communist control. Only a few prices still remain regulated (rents, prices of electric energy). The deregulation process continues according to a pre-announced annual formula so that we expect to reach the equillibrium level of nearly all prices in the near future. An important step forward was the fundamental reform of the social transfer system with the introduction of means-tested social benefits last year. Even if one has the feeling that the system is still too generous, we envisage to continue to adjust it in the future.

The overall climate within the society has changed. Individual responsibility, and not the waiting for help, becomes the dominant social philosophy and psychology. We do not underestimate the role which social policy - organized by the state - should play in a healthy society. However, we do not share the currently prevailing European concept of a social market economy with an overextended welfare-state philosophy.

In the economic sphere, we have been consistently trying to follow basic, well-known, conservative axioms. We have been insisting on healthy finance and on a balanced budget, which we have had for seven consecutive years. Also we have insisted on the continuous diminishing of the share of the state budget on GDP, on the vigorous deregulation and liberalization and on rapid mass privatization of what used to be the state-owned economy. We understood that the role of privatization is absolutely crucial. One qualification is, however, necessary. Its task was to find new private owners and not maximize the Government’s proceeds derived from privatization. I have to admit that we had troubles explain it to our Western partners and friends. To privatize as quickly as possible, we were forced not to rely fully on standard privatization methods which are useful when a government privatizes marginal parts of a whole economy and to replenish them by our own invention, by the so-called voucher privatization. This procedure made it possible to privatize quickly and on a large scale with the involvement of milions of our citizens. This rapid privatization, which led to the situation where the private sector produces three quarters of GDP today (it was zero in 1989), proved to the catalyst of the whole process. Today no additional radical, far-reaching measures stand before us in the economic field. Now the maturing of the whole system will depend more and more on spontaneous evolution of all microagents involved than on the Government’s policies.

In the international sphere we have changed our previous „Eastern orientation“. The organizations as the Warsaw Pact and COMECON were dissolved and at present our aim is to become full members of the European Union and NATO. However, it does not imply that we do not wish to continue our cooperation with the countries on other continents as well as with the countries of the former communist block. It can be demonstrated by the fact that the Czech Republic is a founder and a very active member of CEFTA, Central European Free Trade Area, which has become a very fruitful integration endeavor.

To discuss all of that in more detail would not be very interesting to this audience. Therefore, I wish to continue discussing deeper, more general aspects of all this. When speaking recently at an international meeting in Vienna, I was asked what the tricks are, how it was achieved. I would like to make an attempt to say a few words to that now.

The transformation of the whole society is an evolutionary process which is composed of a very complicated mixture of planned and unplanned movements, of intended and unintended events, a process which is based on a rather delicate mixture of intentions and spontaneity - to use the famous Hayekian terminology. This interpretation of events - however simple and trivial - proved to be very useful for both the theoretical discussions and the practical policy-making. It was an approach disliked only by those who had immodest ambitions of social engineering and who - after the collapse of communism - tried to make use of a unique opportunity to construct such a complex phenomenon as a new social system, and to fine-tune its emergence. Some of us have been warning against all kinds of left-wing social constructivism but I am afraid that a few years ago even some of us tended to make a similar mistake. We should know that capitalism cannot be „introduced“. We should know that it must evolve, grow, gain strength and mature in the way described so clearly by Hayek.

When discussing transformation from communism (not from an interventionist welfare state), I suggest to start with a non-trivial idea that the communist system collapsed, that it was not defeated. It collapsed because it was in an advanced stage of decomposition, because it gradually lost its two strongest constitutive elements - the fear on one hand and the faith on the other. In its final days, the communist system became both soft and unconvincing and such state of affairs was not sufficient for safeguarding its further continuation. It is an irony of history that communism - sort of - melted down which is something that some of our brave colleagues in the post-communist world do not like to be reminded of. Part of their aura would be lost and that is the reason why they try to contest such an interpretation of events. But I am convinced that it is correct.

We are being confronted with an idea that the collapse of communism created a vacuum. At first sight this seems plausible, but it is not. What remained was not a vacuum. We inherited weak and, therefore, not efficient markets and a weak, not efficient democracy. Both the economic and political mechanisms were shallow, the political and economic agents were new, weak and fragile and the outcomes of their interplay were, therefore, less efficient than in a fully grown free society as you know it from the countries which have never experienced communism and where the spontaneous, evolutionary (Hayekian) process of institution-building and agent-formation has never been interrupted. In spite of that there was no need (not to speak about the possibility) to fill the newly-created space with a ready made, imported, from outside delivered system. We had to move at the margin and to make incremental changes. No master-minding of the evolution of a free society was possible.

On the other hand, I agree with those who make a point that it was not possible to wait for a sufficient degree of market efficiency. The quick abolition of old institutions was a sine qua non for success because it was the only way to minimize the non-negligible transition costs. At the beginning the weak markets were not more efficient than the command economy which existed before but this should not become an argument against early liberalization and deregulation measures.

The relative weakness or strength of institutions of a newly formed free society is only one aspect of the whole issue. What about the people? Are they ready for such a rapid change? Does free society presuppose - in addition to the creation of its basic institutions - some set of values or moral standards that would properly anchor the society? Do the people need an interim period of „schooling“? Is such schooling realizable? Are there teachers for such procedure? Are the people willing to be educated? My answer to these and similar questions is simple. The people are always ready and they do not need a special education. What they need is a free space for their voluntary activities, the elimination of controls and prohibitions of all kinds.

When I speak about a free society, what kind of free society do I have in mind? Should we transform ourselves toward a theoretical model of free society or toward a real free society as we see it in many forms in Western Europe and Northern America? Theoretically, the answer is simple and straightforward. The closer we get to the ideal case, the better. In reality, it is more complicated. Whenever I try at home to avoid introducing an illiberal legislation or to repeal the existing one, I am reminded of the same law in one Western country or another, or - recently more and more often - I am being told that what I do not want to accept is the recent recommendation or instruction of the European Commission. Following such examples can become - paradoxically - a constraint on our spontaneous evolution toward a „free society“.

After the collapse of „hard“ communism, we rejected reformed communism, we avoided romantic nationalism (with its very negative systemic consequences), we overcame utopian attempts to forget everything and to start building a brave new world based on aprioristic moralistic and elitist ambitions (of those who are better than the rest of us), but our remaining task is not to lose with statist, interventionist, paternalistic social-democratism which we see in so many free societies to the west of us.

We know that it is our task to attack the expanding state which was - and still is - a dominant tendency of the 20th century, of the century of socialisms with the variety of confusing adjectives. The majority of intellectuals and social scientists of this century considered this tendency to be almost an iron law of history. We have to demonstrate that it is possible to make a return to the liberal (in the European sense) social order.

Walter Wriston Lecture given by Prime Minister Václav Klaus for the Manhattan Institute for Policy Research, New York, 26 September 1996