The Czech Miracle: Why Privatization Went Right in the Czech Republic

By Hazlett, Thomas W. | Reason, April 1995 | Go to article overview

The Czech Miracle: Why Privatization Went Right in the Czech Republic


Hazlett, Thomas W., Reason


There are, at bottom, just two ways to bring economic rationality to a state which has seen none of it. One is to carefully analyze the situation, to call high-level conferences and consult with international experts, to measure each tentative step, to be cautious of doing the wrong thing - of going too far, of giving away too much. The other path is to decide that speed is the very essence of reform and that the great catastrophe lies not in doing the wrong thing but in doing nothing.

Most of Eastern Europe has chosen the cautious route. Alone among the former satellites of the Soviet Union, the Czech Republic has elected to go fast. Now as Hungary, Poland, and Russia struggle to emerge from the abyss of the planned economy, as Romania and Bulgaria and Ukraine bobble in a post-socialist/pre-capitalist never-never land, a thriving marketplace is flashing its sparkle in the Czech Republic, a modern experiment in radical capitalist transformation.

The Czech model was not how the Western experts had charted the East European reform era. Some did support macroeconomic "shock therapy," which has had notable successes in fleeing prices and privatizing small enterprises, but the idea of turning state socialism into private enterprise in an instant - that they considered impossible. If the United Kingdom, with its commercial law, its investment bankers, its management consultants, its brokerage houses, and its stock exchanges took all of the 1980s to privatize 50 or 60 state-owned firms during the regime of the Iron Lady, then surely the task of privatizing the Czech Republic's 2,700 state-owned firms could not be done overnight.

In 1990, Czechoslovakia was the most socialized of any economy in the Warsaw Pact: 97 percent of productive assets were owned by the government. Hungary and Poland, at about 80 percent state owned, were teeming meccas of laissez faire by comparison. By March 1995, however, the assets of the Czech Republic, the two-thirds of Czechoslovakia which split from the Slovak Republic on January 1, 1993, were 80 percent owned by private persons or corporations - easily the highest ratio of any ex-communist European country. Poland, the test ground for early reforms including "shock therapy," is still unhappily stuck at 55 percent private, the same level as Hungary, a country with a 25-year head start on reform.

And the Czechs are not just privatizing like mad, they are "growing the economy." Czech living standards are increasing rapidly. Inflation - which had its pop when pent-up Crowns were unleashed in the early 1990s - is now under 8 percent a year; indeed, the currency has held its ground against the U.S. dollar since 1991. Exports are booming and the federal budget is in surplus. Unemployment is at 3.5 percent, a remarkable feat considering that layoffs from newly privatized firms are virtually ubiquitous. The expanding service sector is swallowing up thousands of "workers" from the "industrial" sector (such employees did not in fact engage in much productive work, nor did their factories demonstrate more than a semantic allegiance to industry). As Prime Minister Vaclav Klaus announced last summer, "We are the first Eastern bloc nation to emerge from major surgery and make it into the post-op recovery room."

Most phenomenal, however, is the electoral payoff of what the government still resists calling the "Czech Miracle." While reformers all across the formerly communist nation-states are in hurried retreat, as former apparatchiks turned populists steam back into power, the classical-liberal government headed by Prime Minister Klaus enjoys no serious political challenge from left or right. Prague is in full bloom and the Czechs are far too busy tending garden to launch the dirigiste backlash which swirls violently just beyond.

The Czech reforms were uniquely radical in transferring property from state ownership to private hands, and the society has responded with a flowering of initiative and entrepreneurship. …

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