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Ladies and Gentlemen,

On the past New Year’s Eve the newspaper Lidove noviny published the "Statement of Independent Economists" written by 14 Czech and Slovak economists including me. In this statement we expressed a clear support to the strategy of market transformation as it was originally adopted and as it was being implemented in Czechoslovakia. At the same time, however, we also presented some critical comments aiming to accelerate and improve this strategy. One of our critical point was that it was wrong from the very beginning to outlaw the trade with voucher books. We also warned that it could be even more dangerous to continue with further prohibitions such as the ban of free sale of shares that would be acquired for voucher books at the end of privatization.

An immediate motive for writing our Statement was the scandal with the so-called unlawful sale of voucher books sometimes in November of the last year. At that time TV presented a documentary showing a legally established organization in one of the smaller towns which was purchasing voucher books from people, mainly gypsies, for 350 Kcs. The agents of this institution were immediately declared swindlers and the Czech Minister of Privatization Tomas Jezek stated on TV that it was imperative to adopt as soon as possible the Act which had been already submitted to the Federal Assembly and which would help prevent such "frauds". The mentioned Bill would ban the trade with shares acquired for voucher books for the period of several years after the end of the first wave of privatization. In the similar fashion, that is by the threat of prohibitions and administrative restrictions Tomas Jezek and other politicians and state officials responded to the vigorous activities of some privatization funds in January of this year. To the public it was presented as an effort to protect common people against deceit and abuse by privatization funds.

This reaction has greatly surprised me. In summer of 1990, when I visited Czechoslovakia for the first time after 23 years of emigration in the USA I was pleased to see that the governmental posts and the direction of the economic reform were in hands of my former colleagues and friends who as I thought believed in the efficiency of the free market mechanism. In the recent months, however, I observe that these liberal economists, monetarists and Hayekeans gradually mutate into politicians and bureaucrats who try to protect the people by imposing such restrictions on the market that reduce competition and make it less efficient.

Recent developments clearly confirmed at least one point of our Statement from the end of the last year. There we wrote that no politician or official can persuade people by his statements, no matter how well-intended, that the voucher book has a real value for them, because no economic value can be created by calculations or declarations of an official. The real value can be created only in the market. Until almost mid-January only very few people listened to the governmental promotions on TV and to numerous appeals of politicians who pleaded for mass registration in voucher privatization. By the end of the last year, which was also the originally announced deadline for the registration, less than one million people , i.e. only a small fraction of all eligible persons, showed interest. Occasional public opinion polls and coverage in the press, radio, and TV revealed that the majority of population did not trust the privatization and that they were neither interested nor did they intend to participate in it.

Approximately in the middle of January a sudden change occurred. Only after the Harvard Fund shortly followed by a number of other privatization funds began to offer guarantees (put options) for the repurchase of shares at the fixed minimum price of ten, fifteen or even more thousand crowns, people realized that the voucher books had real value for them. A well-organized effective campaign of privatization funds, using an extensive network of agents and persuasive even though not always completely taintless publicity, contributed considerably to the change of the public opinion about the voucher privatization. At that point people rushed en masse to get registered and long lines began to develop in front of registration offices. The forms of voucher books were in great demand and they were quickly sold out. The reaction of former liberal economists transformed into politicians and state officials was again characteristic. They blamed the shortage of voucher book forms on the speculative behavior of some privatization funds and began to threaten them with cancellation of licenses. The common citizen was then rebuked for not having obeyed the politician who advised them to quickly register already before Christmas. Hours spent in lines in front of registration offices were called a just retribution for this disobedience.

After a short time, however, it became evident that there were no major speculative purchases of voucher book forms. Simply the number of printed forms was insufficient. The demand that was raised by the fact that the guarantees of privatization funds endowed voucher books with a real value, exceeded by far the most optimistic estimates of state officials. In the second half of February, instead of the expected 2 to 4 million, the number of registered voucher books surpassed 8 million.

I find it surprising that the Czechoslovak Hayekeans and Chicago-school economists did not understand that the real value can be created only by the market. I remember, that as a student of the Prague School of economics I learned already in the fifties, that even according to Karl Marx only such goods had a value which are traded in the market. Marx’s labor theory of value is obsolete now, nevertheless he knew that the value did not exist outside the market. Why did he know it? Maybe because he was a good student of Adam Smith. Maybe also because providently enough nobody offered him a ministerial post. And today we face a situation when an government official is convinced that he is the only one to know the real value of a voucher book and that he is the only one who can protect citizens by prohibiting the sale of books. It should be clear that if the trade with voucher books were legal from the very beginning their actual market value would have been known long ago, people would have shown a mass interest in voucher privatization already in November and December, and any "swindlers" would have failed in their attempts to purchase voucher books for 350 Kcs because everybody would have known that it was possible to sell them on the free market for say 15 thousand crowns.

Unfortunately, we still do not have the free market for voucher books, and thus their real market value is not known. Guarantees and options issued by privatization funds as well as agreements on future purchase of shares acquired for voucher books are only inadequate substitutes for free market and thus provide us only with a very imprecise information about the market value of voucher books. As a result we cannot even say now how much money will lose people that will fail to register their voucher books. And in case somebody has sold his/hers voucher book on the black or gray market we can hardly say whether and how much he/she lost or gained. Freeing the market with voucher books would have been a far better protection of common people than prohibitions and restrictions imposed by government.

After this introduction I will divide the remaining part of my Lecture into five parts:

  1. A brief history of voucher privatization and views of its critics.

  2. Estimate of a hypothetical market price of a voucher book. Is there a danger of a financial collapse after the end of voucher privatization?

  3. Voucher privatization and inflation. Will the property distributed by vouchers turn into "hot money" that will be used for the purchase of consumer goods and thus will trigger hyperinflation?

  4. Development of investment funds and experience with their regulation in the USA.

  5. Conclusions. Can a financial collapse be prevented? How to avoid hyperinflation? How to regulate privatization funds?

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