No Third Way Out

Creating A Capitalist Czechoslovakia

John Fund from the June 1990 issue

(Page 2 of 4)

Klaus: Well, of course, we are applying for admission to the International Monetary Fund. I think there are some problems with their economic prescriptions for developing countries, but it is important for us to have the kind of credit rating that IMF membership would indicate. But as for classical foreign aid, this is the last thing on our agenda. I know what it has done to other countries. For us, it would bring inflation and a certain timidity in the making of economic policy. It could allow us to delay needed economic treatments and send us into the reform trap.

Reason: Your colleague Valtr Komarek [Czechoslovakia's deputy prime minister] recently said that "If a market economy were imposed immediately on Czechoslovakia, economic agony would result." He claimed at least a third of the country's production would be destroyed. This sounds like there is a real disagreement within your government about how much of a market economy the country should have.

Klaus: It is true that the move to a market economy has to sometimes be tempered by considerations of power. I share with my colleagues a broad consensus on what needs to be done, although there are issues where I want to move faster than they. We all agree on what things should be done, but there is the political problem of selling it to the public. Privatization of the state-owned economy is not yet on the agenda. We cannot do it immediately; my colleagues would not agree to it. But we must put all forms of ownership on an equal footing immediately and let different types of ownership compete with the state firms.

Reason: Are you happy with the pace of reform so far?

Klaus: I think we have moved a good distance quickly. This week, we created a Board for the Temporary Administration of State Property that will look into selling government-owned assets. We will also allow state companies to sell shares to their workers and will pass a law allowing citizens to start companies of their own with no limits on the number of employees or on the firm's output. We will also propose a law on share-holding companies to allow foreigners to own up to 100 percent of a Czech company.

Reason: Will Czechoslovakians welcome foreign investment in their country or will they resist it?

Klaus: I had a long interview with a trade union paper on this issue a few days ago. They asked me whether I would allow a money-losing, old plant in Slovakia to be sold to foreigners. I laughed and said, "Do you know what you are saying? A money-losing, run-down plant and a foreigner wants to buy it? We should be lucky if we find a fool in the West who wants to buy it and try to make it profitable. Everyone will benefit from that, except perhaps the Westem investor." They had to agree.

Reason: Are you getting a lot of inquiries from potential Westem investors?

Klaus: We are flooded with hundreds and hundreds of requests and ideas from Westem investors. The problem is that we have no rules set up for them to follow yet. We must have the time to create strict rules so that property is not sold by Communist managers for a low price. They often get payments under the table to sell to the first bidder. This does not build public support for a market economy.

Reason: You mention that Westemers have some common misconceptions about Czechoslovakia. What are they?

Klaus: First, there was this belief that the Czechs were satisfied with communism and would not rise up as the East Gemmans and Poles did. What is not known is that there was a quiet revolution going on for months before the end of November [1989]. Civil disobedience, bureaucrats ignoring orders, soldiers resolving not to shoot at demonstrators- -the Communists had lost control before November. New thinking was going on in many places. The Westem press concentrated on the brutality of the police, which was important, but it missed the changes from below. People like me who were engaging in brinkmanship with the party economic bosses and the open dissidents who were being arrested were pursuing a common goal in different ways.

Reason: Are you getting what you consider bad advice from some Westem economists?

Klaus: Some, but only because they misunderstand the Czech economy. They think we had a classic centrally planned economy and therefore must decentralize economic decisionmaking within the govemment. But a centrally planned economy implies very powerful central planners and weak state managers of enterprises. That is perhaps how the country started in l948 when the communists took over, but now we have giant, powerful state monopolies and very weak central planners. These economic giants were almost totally independent. The task is not to give them more power, but to break them up. Our philosophy can be summed up as demonopolization. That means following a very restrictive fiscal and monetary policy which will squeeze the monopolies and cut their subsidies. On the micro level we will allow other economic agents, both domestic and foreign, to compete with them.

Reason: You and I first met at an August 1989 conference in North Carolina on competitiveness sponsored by Liberty Fund. How were you able to secure permission to attend?

Klaus: I had met Albert Zlabinger [the head of the Carl Menger Institute in Vienna] at a conference in Budapest in early 1989. He was very excited to find someone in the Eastern bloc who knew about Hayek and [Hayek's mentor] Ludwig von Mises. He gave me a list of Liberty Fund conferences and asked if there was one I could attend. I said the one on competitiveness because that would sound like something my superiors would approve.