Dismantling Socialism
Systemic Transition: The Mixture of Intentions and Spontaneity
Preconditions  for Social Development


Vaclav Klaus


…For me to speak here tonight is not just an honour; it is at the same time an enormous challenge and responsibility. My country has been for so many ye­ars cut off from the rest of the world. We lived not only in an economic aut­archy; we lived in an intellectual autarchy as well, which was — probably —even more dangerous, frustrating, and debilitating. We have not had many op­portunities to speak abroad anywhere, let alone Australia. Many misconcep­tions and misunderstandings abound. I shall try to discuss some of them here tonight.


Dismantling What?


The title of my Lecture is somewhat misleading, because we have to distinguish between explicit and implicit socialism, between Soviet-type and welfare­state-type socialism; we have to fully grasp the meaning of last year’s Bonython Lecture by James Buchanan, ‘Socialism Is Dead But Leviathan Lives On’. It is relatively easy to dismantle a one-party system, to formally liquidate insti­tutions of central planning, to disgrace communist ideologies and irrational and disfunctional economic policies, and to provide legal guarantees for free speech. It is much more difficult, however, to construct from scratch a stable political system based on several well-defined and transparent political parties, to create efficient markets in a highly-monopolised and semiclosed economy, to uproot leftist ideologies and distortions in behaviour and the expectations associated with them, to stop deep-rooted government interference in the economy, to block popular redistributional practices, to dissolve dangerous lobbying, rent-seeking, protectionist organisations and pressure groups, and so on.

Creating a new political, social and economic system is a formidable task. It is even more difficult after 40 years of ideological brain-washing, with serious ideological and social prejudices, with lost memories, with unprepared teach­ers, journalists and ‘scribes’ of all kinds, and with various wrong signals coming from Western countries. The ideological or psychological side is very import­ant, but the practical, ‘material’ side is no less demanding. We are confronted with an unavoidable J-curve concerning living standards, industrial and agri­cultural output, and GDP. Any movement forward requires the elimination of old, inefficient, unsustainable, artificially-promoted economic activities, and the replacement of disguised, hidden, unreported and non-measurable economic and social negative phenomena with visible, measurable and, therefore, reported evils: open unemployment rather than hidden unemployment in the form of labour hoarding, open inflation instead of repressed and hidden inflation, output losses instead of output gains dissipated in unsaleable inventories at home or in frozen assets in various developing countries.


We have been saying for several years now that “socialism is dead”. If we mean that socialist beliefs have been decisively refuted by experience, then what we say is correct. But socialism per­sists in political demands and preferences of very many people, and as Professor James Buchanan said in last year’s Bonython Lecture, disillusionment with big government in the West has not led to any mass enthusiasm for free marker and free society. In dismantling socialism both in Western and post-communist countries we should be prepared for reversals and setbacks. The virus of so­cialism, though exhausted, may still survive.

It is common knowledge, embodied in the classical Mises-Hayek arguments, that irrational success indicators used in the planning process, along with distortions in prices, create a wasteful economic system which penalises ‘positive’ activities and promotes economically, socially and environmentally damaging activities. The latter must (and will) be halted. But the opposition to doing that is enormous and survives the dismantling of the formal institutions of explicit socialism. Most of the countries of Central and Eastern Europe have succeeded in dismantling explicit socialism. But replacing it with a functioning free market system will be our task for the whole decade of the 1990s.


Two Serious Western Misunderstandings


The implicit assumptions that the East Europeans will lose nothing when the socialist redistributive process is stopped, and that the systemic change is an easily manageable technical task, constitute two serious misunderstandings in the West.

Traditional comparisons of spiritual and material life in Eastern (or rather Eastern European) and Western countries in recent decades give us a some­what simplified, black-and-white picture, which reinforces an a priori belief that citizens of ex-socialist countries have absolutely nothing to lose and are therefore eager to jump on the ‘road to freedom’ despite all the suddenly-emerging uncertainties of the transitional period, despite all the potentially unfavourable combinations of success and failure, despite emerging inequalities of income and wealth (and the accompanying envy), and despite the loss of a relatively easily selfarranged leisure, of a strange kind of comfort and of un-demanding individual irresponsibility. Susan Marie Szasz put it clearly in the Winter 1991 issue of Policy: ‘Are they [the people of Eastern Europe and the Soviet Union], in return for true freedom, prepared to give up bread lines for unemployment lines?’ (Not that we had bread-lines in Czechoslovakia, though there were queues for many other products.) The answer is far from a simple ‘yes’. I have to argue that the ‘West’ seriously underestimates the relative material ‘lightness of being’ in countries like Czechoslovakia in the past decades even if it might be — to use the title of the famous novel by Milan Kundera — for many other reasons ‘The Unbearable Lightness of Being’.


At the same time, the ‘West’, basically because of the lack of understanding of the enormous fragility of its own political, social and economic system (as Thomas Sowell reminds us), underestimates the relative difficulties of the transitional period. I am again and again shocked when the same people the­oretically harshly criticise the scope of human oppression in communist coun­tries but do not believe that I, like millions of other Czechs and Slovaks, was not allowed to travel abroad between the end of the Prague Spring and the beginning of our Velvet Revolution, which means almost 20 years. I am again and again surprised that distinguished Western Sovietologists, after years of accurately describing the wasteful economic activities of a command economy in their sophisticated, now partly obsolete, textbooks, criticise us for our in­ability (and, of course, unwillingness) to orchestrate Keynesian, expansionary macroeconomic policies and/or interventionist industrial and sector policies. I have to add that such notions are frenetically applauded by our old central administrators as well as by their intellectual supporters in the academy….


The Goal of Reform


Given all the intricacies and complexities of the systemic change we are under­going, we need to have:

•   a clear, straightforward goal and vision;
•   a rational, all-embracing and properly structured reform strategy; and
•   a pragmatic approach to the sequencing problem and the capacity to con­trol it.


My widely-quoted phrase of last year — ‘market economy without adjectives’ — was a necessary reaction to repeated attempts in my country and elsewhere to construct and support various ‘third way’ hybrids as targets of the transfor­mation process. Adjectives like ‘social’ or ‘environmentally conscious’ are nothing other than attempts to restrain, limit, block, weaken, dissolve, or make fuzzy the clear meaning of a market economy and to introduce into it non-market elements. I feel I should now advocate the use of adjectives, but adjectives with a totally different meaning. We need an unconstrained, unres­tricted, full-fledged, unspoiled market economy, and we need it now. Instead of waiting and prolonging the agony of a post-totalitarian, post-centrally-planned society and economy, instead of looking for partial, temporary, suc­cessive targets or subtargets, we have to find a straightforward way, an ideo­logical turnpike which will bring us in an optimal and speedy way to our final target (the so-called turnpike theorem). The turnpike has no room for ‘social­ism with a human face’ associated with the Prague Spring of 1968, for flirt­ations with the ‘market socialist’ dreams of Western social democrats, labourists and liberals (I mean liberals in the American sense — see my recent note ‘What is Real Liberalism’, Fraser Forum, May 1991), or for misleading con­cepts of perestroika prevailing in the Soviet Union these days. Such a strong, theoretical, pro-market conviction is, in my own case, increasingly reinforced by very practical arguments, since our everyday task of masterminding the reforming economy (without planning directives but with very inefficient markets and with still-dominant stale ownership) demonstrates how futile, unpro­ductive, and unfounded any direct government intervention is.


The ‘Hard Core’ of Reforms


The ‘hard core’ of necessary reform measures, defining the critical mass for a systemic change, includes several very simple steps:

·        early, rapid and massive privatisation;
·        price deregulation;
·        foreign trade liberalisation and currency covertibility;
·        cautious macroeconomic stabilisation policies
         (monetary and fiscal conser­vatism).


One can start crossing the Rubicon with any one of the hardcore measures, but the opposite shore can be reached only with all of them together. All of them are self-evident, the words used are selfexplanatory, they do not include half-measures or eternally-postponable targets. In Czechoslovakia, they are reflected in crucial parts of our Scenario for Economic Reform, which was ap­proved by the Federal Parliament in September 1990.

Detailed description or analysis of these reform measures is beyond the scope of this Lecture. But I will comment briefly on some hotly debated issues in our part of the world.

Privatisation is the top priority of all truly reforming economies. An over­whelming shift of property rights from government to private hands is essential if these economies are to become market systems. Privatisation must be carried our rapidly; thousands of state enterprises must be denationalised in several months or years. In this respect all comparisons with Margaret Thatch­er’s achievements, despite my admiration of her personal integrity and her economic policies and political stances, are inapt and misleading. We cannot afford to privatise only a dozen state enterprises in a dozen years. Western consultants (very often highly-paid experts from international institutions), to­gether with domestic opponents, raise objections to rapid privatisation be­cause they are convinced that there exists no suitable basis for evaluating the state enterprises to be privatised in Eastern Europe: that until market forces determine the prices of outputs and inputs, enterprise profitability cannot be correctly evaluated and privatisation should be therefore postponed. As Charles Wolf Jr. aptly argued recently (‘Sweepstakes Capitalism’, The Wall Street Journal, July 12, 1991), ‘this objection is spurious. It arises from a mis­conception about the meaning of privatisation. . . What is essential is an effec­tive means for shifting ownership from state to private hands’. And I would dare to add, ‘and not the maximisation of government revenues from privati­sation’.


Czechoslovakia did not choose the ,privatisation by randomisation’ suggest­ed by the same author (i.e. a sort of national lottery) but invented and tries to realise a non-standard ‘voucher privatisation method’ which overcomes the valuation problem with a ‘free to choose’ procedure. The Czechoslovak citiz­ens will receive vouchers (for a nominal price) and will be free to exchange them for shares in denationalised enterprises. This procedure, now being care­fully studied by other reforming countries, should help us to achieve our prior­ity reform target swiftly and without unnecessary delays. …

Price deregulation is correctly understood in reforming economies to be the necessary precondition for a normally-functioning market economy. The problem is to implement such a drastic measure after decades of frozen, ad­ministered and disequilibrium … Price deregulation must take the form of ‘shock therapy’ because gradualism creates more problems than it solves. Partial deregulation creates new distortions in the price structure that are as bad as the old ones. Price distortions require new subsidies; new subsidies mean renewed government interference in the economy; and back we are with the old game. Price deregulation must therefore be over­whelming, and residual regulatory methods must be rather soft: instructive guidelines for price formation, not direct controls or directives….


Foreign trade liberalisation and currency convertibility are the most effec­tive instruments of competition policy. International competitive pressures form the only feasible demonopolisation procedure because demonopolisation by break-up is a delicate and lengthy task. It necessarily takes time and ex­pertise and is in one specific sense premature: we want to leave all kinds of in­dustrial restructuring to the new owners, which means leaving it until after privatisation. The new owners and managers would do it more efficiently than government bureaucrats. ….

On the macroeconomic side of the reform, we have to avoid a similar dang­erous trap. The macroeconomic task is conceptually simple, but practically very intriguing. Macroeconomic restriction, based on a state budget surplus and on very prudent monetary targeting, is absolutely necessary, since without it a vicious circle of inflation and stagnation will evolve and direct controls will be reintroduced. A restrictive fiscal policy coincides with the declining role of the State and with the cutting of all kinds of subsidies, which makes it easier. …

The reformers are under heavy pressure to relax their restrictive macropolicies. They are accused of deliberately keeping aggregate demand at an insuffi­cient level, and the well-known arguments in favour of Keynesian expansion­ary policy are endlessly repeated. We know, however, that the slope and posi­tion of our aggregate supply curve do not promise any positive short-term sup­ply response, so that any loosening of demand constraints would be counterp­roductive and inflationary. But to keep macropolicy on track in a rapidly changing environment is almost impossible. Our task is to minimise errors, not to emit false signals or to reflate the economy. 


Systemic Transition:
The Mixture of Intentions and Spontaneity

Excerpts from the Address by the Prime Minister of the Czech Republic,

  Vaclav Klaus

at the Centro de Estudios Publicos, Santiago de Chile, April 21, 1994


".... systemic transition ....... is not an exercise in applied economics but a very interesting mixture of intended and unintended events..."

"..... the ability of political leaders to do the right things when they must be done is absolutely crucial."

"I strongly warn against attempts to follow the scientific /or quasi-scientific/ sequencing rules because no masterminding of reform measures is possible. We are against all form of political constructivism and of social engineering a priori, ideologically, but at the same time we know that it is unrealizable in practice."


" The whole process starts ......  with the collapse of old institutions and rules."

"Stage No. 1: The central planning ....... disappear and with it the old not efficient, but feasible coordinating mechanism. An institutional vacuum is created..."

"..very weak ... markets start to functions-without formal deregulation ...... and without explicit property rights."


"Communist party ceases to function ......a nation wide unity is created  ... only in a negative sense, against the old system ...  unique psychological euphoria prevails  ... There is a widespread readiness to 'tighten the belts'."

"The government must announce ... the end of economic paternalism. Swift elimination of subsidies of all forms must be done without hesitation .... "

"There cannot be any gradualism, the change must be done in a "shock therapy" way..."

"...fiscal and monetary policies must be very restrictive. .."


".. domestic ... price liberalization  must be done in this first stage. Without such a move economic agents cannot behave rationally and a new coordinating mechanism cannot be created. ...  fixed exchange rate must become the nominal anchor of the whole economy...."

"Stage No. 2:   Expectations are enormous, results are not seen. .....  an economic decline - especially after the collapse of external markets - is inevitable ..... it is a transformation shakeout of nonviable economic activities."

" ... euphoria 'evaporates' .. the nation-wide unity ... is lost, ..  an enormous degree of political atomization and an increasing degree of political instability ... cannot be avoided"


" The new pressure groups ... begin to misuse the existing institutional vacuum, ...Wealth and income disparity grows, .... Exactly at that moment the turning point comes: either rational strategy ...  or chaos, anarchy and vicious circle of half measures and concessions to pressure groups.."

"Macroeconomic stabilization must continue,... residual deregulation of prices, the elimination of remaining subsidies and aggressive fight with all forms of protectionism should not be stopped. No concession to vocal pressure groups should be done."

"Organized privatization, ... should be initiated.  It must be rapid, it must find new owners, it should not maximize state privatization revenues, it should not be confused with restructuring /and modernization/ of the firm."

" Rational social policy -  must accompany political and economic measures, ...extremely costly welfare programs should be avoided "


".. exchange rate /dramatically devalued before foreign trade liberalization/ must stay below purchasing power parity. "

"Stage No. 3: If the "fixing up", suggested in the previous paragraph, is successful the post transformation stage is reached. The constructive role of the state is over, it should play - again - standard, more or less passive, non-interventionist role."

"The early post-transformation stage inherited weak economic and political markets and structures. Their deepening and widening where the state - actively - cannot do much - it must permanently eliminate all the barriers of political and economic freedoms. "


Vaclav Klaus


For citizens of my country, I accept this honor as a confirmation that they are moving in the right direction, that they chose the right and the fastest way toward a normally-functioning, free and democratic society and economy. I hope you know, and I may confirm it now, that we do not hesitate as we ap­proach our unique task. We do not intend to slowly and gradually dismantle an economic, social and political system which degrades and unjustly treats citizens, which wastes and destroys the nation’s natural and cultural heritage accumulated through the centuries. We do not plan to endure a long, unstable and unproductive hybrid of unreconcilable elements from two different worlds, free society and serfdom — the first characterized by parliamentary democra­cy and a free market economy, the second by dictatorship and by central planning. We started 18 months ago, and we are now doing away rapidly with the old institutions and with the old rules and we are preparing all necessary preconditions for a successful takeoff into the normal world, the world in which you have had the privilege and, I would say, the right, to live.


If  I may use a term which your students of economics can find in advanced microeconomics textbooks, I would say that we in Czechoslovakia, or at least some of us, have already understood a rather sophisticated concept called the Turnpike Theorem, which defines the fastest way toward achieving an optimum situation. Instead of using a winding road of half-measures, of pseudosocially motivated concessions, delays, ideological errors and prejudices, one should endeavor to follow a wide and straight ideological and economic turnpike as soon as possible, even at the expense of some short-term losses.

In our case, this straight path consists of political pluralism, of constitutional guarantees, of private property, and of a full-fledged market economy. Turnpike, if I may use the term, does not include the third-way thinking known from the Prague Spring in 1968. The turnpike definitely does not include  the market socialism series flourishing in the West. The turnpike definitely does not include the perestroika way of thinking, the perestroika way of squaring the circle, so well-known in Eastern Europe and especially in the Soviet Union in the second half of the ‘80s and nowadays. To preach such social utopias; is an intellectual irresponsibility with very damaging consequences. This is something we definitely don’t want to do.


So, therefore, my ideological turnpike. We are well aware of the fact that getting from here to there will require sacrifice, will require hard work. Sometimes times people in the East and, I would add, sometimes people in the West as ­well, do not sufficiently appreciate the fragile and unstable mixture of institutions, rules and behavioral patterns which are necessary for the emergence, maintenance and continuation of a smoothly and efficiently functioning society and economy. Especially in the Western world, it is taken almost for granted that such a state is normal and perhaps even eternal. I would like, therefore, to remember the well-known dictum of your distinguished scholar, Thomas Sowell, loosely quoted, “The absence of poverty, tyranny, and injustice is a miracle, a happy coincidence of circumstances in time and space, whereas their presence is a more probable phenomenon.”

In Czechoslovakia, we understood very early that a revolution changing the political climate is not sufficient and that in fact, it is the easier, much easier part of our task. Much more difficult is creating new institutions, defining and legally establishing new rules, enforcing new behavior patterns in the economic sphere. And especially, the most important thing is designing and implementing a feasible transformation strategy. I would like to say a few words about that.


The whole transformation process in my country is based on four main pillars, which may be summarized as follows. First, we know that state-owned firms must be massively and rapidly privatized. This is the first pillar of our transformation strategy. This will be accomplished in Czechoslovakia with the active participation of both domestic and foreign economic agents and with a mixture of standard and nonstandard privatization methods. We have to combine standard methods, known in your textbooks, and nonstandard meth­ods because the standard methods will not do the job in our very specific case. The scope of privatization, we have to realize, is not comparable with what I have to call the marginal privatization efforts in the West. We have to priva­tize the whole economy, not just a few firms a year. Also, the speed of privati­zation is, in our case, measured in weeks or months, definitely not in years or decades. And finally, Czechoslovakia lacks domestic capital as a result of re­latively low saving ratios in the past and as a result of our lacking developed fi­nancial markets and financial institutions.

Therefore, we suggested a very specific privatization method called “the voucher scheme,” which means that all citizens in the country will get vouch­ers. At first we wanted to distribute them free. Then we discovered that it’s ne­cessary to sell them for some very nominal price so that they can be used for buying stocks, shares of the previously state-owned firms. This ingenious scheme, which was created in my ministry with a few friends around me, is now very popular all over the world. I am discovering visitors from other countries trying to understand and to use it in their own countries. We have delegation after delegation from various republics in the Soviet Union. This morning I was told by a man from Slovenia, in Yugoslavia, that they are trying to use the same system as well. As some of our colleagues in the West are say­ing, this idea will definitely come into the economics textbooks of the next cen­tury, in both cases, if it fails or if it succeeds. This is a danger, but definitely we don’t see any other way. Using the standard methods, privatizing three, four, five firms a year, we will be able to privatize our society and our economy in several hundred years’ time. So, we cannot afford it and we have to discover a method which will make it possible to do it now.


As regards results, our privatization process was divided into two parts, the so-called “small” privatization, on the one hand, and “large” privatization on the other. The small privatization is going on. It started this January. Small businesses are sold on public auctions every week, every weekend in Czechos­lovakia. Every weekend there are tens of small businesses sold in all small cit­es in the country. If I am not wrong, the last figure I know is around 3,000 small businesses sold in public auctions in the last two months’ time. In this respect, the process is encouraging. The privatization of large businesses by means of mostly joint ventures is going on permanently now, and the privati­zation with the use of the voucher method will start this autumn. So, we defi­nitely want to privatize a large part of state owned firms in a year, two years’ time. So, this is the privatization sphere.

The second pillar of the transformation process in Czechoslovakia involves the opening of domestic markets. The crucial moment was definitely price lib­eralization — the lifting of price controls, the deregulation of prices — which we consider a necessary precondition for a functioning market economy, as well as for the elimination of government’s excessive power to intervene. And this step, this crucial, crucial step is a most important measure, which can’t be just realized overnight. It was introduced in Czechoslovakia in the beginning of 1991 on the 1st of January. Of course, as a consequence of the repressed inflation due to administered prices in the past, as a consequence of the inherited, monopolistic market structure, as a consequence of three successive, rath­er significant devaluations in the last year, open inflation in January was really very high, very dramatic, which created a very complicated political, social and economic situation. But our restrictive macroeconomic policies, I would argue, succeeded in breaking the initiation of a dangerous inflationary spiral. We tried to keep the current episode as a once-and-for-all, transitional corrective inflation, which, we hope, will not be repeated. We hope that the inflation­ary wheel is already under control.


For the economists here in this audience, I would argue that the results are very positive and encouraging. The inflation in January on a month-to-month basis after price liberalization was 26 percent, which was really a shock for the population. After 40 years of administered, practically frozen prices, it was something totally new, totally unexpected. The rate of inflation in February was 7 percent, in March 4.7 percent and yesterday morning before boarding the plane for Boston, I called my friend, the chairman of the Federal Statistical Office, and I was told the rate of inflation in April, on a month-to-month basis, was 2.9 percent. I, at least, hope that we will be the first country in Central and Eastern Europe to bring inflation under control and hopefully there will be no other dramatic jump of prices, as in January. So, this is a very significant development. I hope we will succeed, because we need the support of the people in the country. Inflation is the worst public enemy, both in your country and in Central Europe as well.

The third pillar of the transformation process in Czechoslovakia represents opening the Czechoslovak economy to the rest of the world. Domestic price liberalization has been accompanied by similar steps in our external economic policies. Far-reaching regulation, legislation and institutional changes have been introduced. Foreign trade has been practically liberalized. The internal convertibility, sometimes called “resident” convertibility, of the Czechoslovak crown was put into operation the same day, on the 1st of January, 1991. By devaluating the currency at the end of December of last year, we hope to have found the defendable exchange rate. We hope that the exchange rate we chose will be the anchor for the whole price structure and price level in the future, and again, I must say that the first results are definitely positive and encouraging. These changes have considerably limited government intervention and have systematically enhanced the freedom of domestic Czechoslovak firms in foreign trade operations and enhanced the freedom of foreign firms in Cze­choslovak markets. So, this is the third cornerstone of our radical economic strategy, which was implemented this year and partly last year.


I already mentioned the fourth crucial part of our reform strategy, which is a very cautious, very conservative, very restrictive monetary and fiscal policy. We are accused, very often, of being the monetarists of Czechoslovakia. I am very often accused of being the Milton Friedman of Czechoslovakia by intro­ducing very restricted monetary and fiscal policies, by stressing that public enemy number one is inflation, and not unemployment. So the debates aren’t the same on both sides of the Atlantic. We started the reform with practically zero rate of growth of the nominal money supply for 1990, which means negative growth rate of the real money supply, and with a very cautious (and we are warned nowadays, maybe overly cautious) monetary policy in 1991. Fiscal policy, my fiscal policy in 1990 and in 1991, is based on something unique in this part of the world, on a surplus state budget, on nodeficit financing. And in this respect, ironically, we are probably the only country in the world which has no problems with the International Monetary Fund, because our own poli­cy prescriptions are probably harsher than the medicine the IMF is trying to prescribe to us.

With the fiscal policy, I have a personal story. I was appointed Minister of Finance on the 10th of December, 1989, and just accidentally I came into my office on the 11th of December and I discovered on the desk a huge document called, “The State budget for Czechoslovakia for 1990,” which I was expected to present in the Parliament on Wednesday. It was Monday and I was expect­ed to present the state budget for 1990 on Wednesday in the Parliament, and the budget was with deficits and with all the subsidies. So, I didn’t bother even to read the document. I came to the Parliament, and announced the provision­al budget for the first three months of 1990 and promised to bring a new bud­get in March for the rest of the year. So we really succeeded in totally changing the macroeconomic climate in Czechoslovakia by restrictive monetary poli­cies, by a surplus state budget, which is a dramatic and important change. I’m sure, as you know, we used to live in an excess-demand economy. It was a permanent feature of a centrally-planned economy that demand always ex­ceeded supply. There was a lack of all goods and commodities. Even with Cze­choslovak tradition (and we were more cautious than other countries in the re­gion), with our restrictive policies last year and this year, and with price liber­alization, we totally changed the climate and we appeared suddenly in a totally new world. We appeared to live in the world of excess supply.


It’s a totally new experience for all the citizens of Czechoslovakia and it’s really a dramatic change. We are under tremendous pressure now to be less restrictive, to introduce Keynesian expansionary political measures. We are advised by the Keynesian economists in this country to do that, but we have to keep our restrictive policies, I am pretty sure, for three basic reasons. Our first priority is to stop dangerous inflation. Second, we know that the supply-side response is, and for some time will be, rather modest. In the not-yet-privatized economy, we cannot expect a positive supply response, and we know that the expansionary monetary and fiscal policies would be reflected in prices, in in­flation only and not in output growth. The aggregate supply curve, in econom­ic terminology, is rather steep and its location is really not very good. The third reason for restrictive policies for eliminating all the subsidies is that we have to squeeze out the most inefficient parts of our economy by eliminating what I would call artificial demand, based on government spending in the past. So, we definitely don’t want to stimulate false and inefficient economic activities anymore. So, to repeat the four main pillars or cornerstones of our reform strategy — privatization, price liberalization, currency convertibility and rea­sonable, rational, restrictive macroeconomic policies — is the reform package we introduced and we are trying to realize in Czechoslovakia now.

I would like to say something about the lessons we learned in the past year and a half. I am often asked whether I had to change some of my previous orig­inal assumptions, prejudices, ideas — whether I learned a lot. I learned a lot, definitely, but I have to say our policy is unchanged, and we are strictly follow­ing our original reform strategy and don’t intend to change it, to slow it down, to somehow start a perestroika-sort of reform or anything like that.


What I have learned is something I should have known in advance, but I must admit that I was in the tenets of economic theory and rationalistic econ­omic doctrine as well. Last year, in my speeches, I preached that the crucial aspect of the economic reform is sequencing. The sequencing of various re­form measures is considered the art of reforming, in the economic literature. Now I understand that this is a wrong, pseudo-rationalistic, technocratic idea. Simply, we are not able to dictate the speed and the sequencing of the reform measures. We are not able to fine tune the reform. It is as wrong, as misleading as the attempts to fine tune the economy. Simply, there is nobody sitting in the heavens pushing buttons: Reform measure number one, number two, number three, dictating the speed and sequencing of the radical economic transforma­tion. This is not the reality. We don’t live in a totalitarian regime. There is no dictator who would be able to issue directives, commands of that kind. Simply, we have to accept the reality and in this respect, the reform goes as it goes. It probably cannot be accelerated and it shouldn’t be slowed down. But again, as in other fields of human activity, we are not in command of such complicated social processes as political, social and economic transformation. It has its own dynamics and it follows its own rules. In this respect, I have to admit I was preaching the art of sequencing last year, and this is the most important change in my thinking.

I hope that the Czechoslovak political system will support the necessary economic transformation. You were told in the introduction that the leading Czechoslovak political force, the Civic Forum, which originated in the Velvet Revolution of November, 1989, and which was an umbrella organization just covering, just putting together various political groups, doesn’t exist anymore. It was split into two parts, the left-wing party, using the term “liberal” I have to say in the American sense, not in the European sense, to my regret —and in the right-wing Civic Democratic Party, which had a founding congress two weeks ago and where I was elected as the chairman of the first, really, right-wing political party in Czechoslovakia in the last four or five decades.


So, we definitely hope that we will succeed in the next elections, June of 1992, because it is necessary for the continuation of the radical transformation of the Czechoslovak society and economy. Czechoslovakia’s transformation may be now at the end of the beginning, and we know we have a long way of hard work, sacrifice and learning before us. I would like to finish by saying we are ready to march, though sometimes it is difficult to explain to the Czechos­lovak citizens that at least some of us already see the light at the end of the dark tunnel, which is our transformation now.

Again, on behalf of the Czechoslovak citizens, who are all, willingly or un­willingly, actively or passively, involved in this transformation process, I thank you for your kindness today and for the honor which you have pre­sented to me. Thank you very much.

Preconditions  for Social Development
Vaclav Klaus
Prime Minister of the Czech Republic

Excerpts from the Speech for
the World Summit for Social Development - Copenhagen,
March 11, 1995


"... Our transformation maneuver has been successful. We have already entered an early post transformation stage which means that we have completed main transformation measures and started the period of a more or less 'normal development'...... "   

"... the main lessons from both our communist period and the following transformation period... are simple but not trivial: "


" In every society there exists a mutually reinforcing interplay of political, cultural, social and economic factors. We can confirm ........a strong complementarity among them. You cannot  ....... substitute one for another. High degree of symmetry and harmony among them .... is absolutely necessary.

" The fashionable ideologies of the fifties and sixties suggesting the crucial role of governments, state ownership, planning, development agencies and development aid are over. The old utopian dreams of social engineering are forgotten and it has been more and more accepted that everything starts with an individual human being, with his or her behavior and activity, with free markets, private property, and private initiative. The collapse of communism gave a final blow to the previous etatist thinking."


" The improvement of human lives requires political and economic freedom ..."

"..... the development strategy must be multidimensional and flexible, it should not aim at achieving an optimal sequencing of measures, it must be credible, it must be based on national (and social) consensus because nation-wide support is more important than technicalities..."

"The development task is a domestic one and the role of the assistance from the rest of the world is marginal at best."   


"... the best the developed world can do to be helpful to the developing world is 

  • to stop all forms of protectionism and to let the law of comparative advantage to organize trade and investments among countries instead of trying to create a "new world order" based on aprioristic constructivistic ideas;

  • to stop exporting ideologies (with the exception of elementary human rights) and life styles which are often alien to countries that have to undergo a profound change;

  • to stop blocking trade among developed and developing countries by making obstacles through misplaced and false accusations based on arguments like social and ecological dumping."

".. the developed countries should refrain from adding new problems to the developing world......"







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