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Chief Executive (U.S.), September 1994 | Go to article overview

Star Czech


Alone among such former Eastern bloc countries as Lithuania, Poland, and Hungary, where former Communists have returned to power in the guise of social democrats, the Czech Republic endures in its commitment to free markets and anti-interventionism. Why this is so has something to do with history. After the fall of the Berlin Wall in 1989 Central Europe's planned economies faced similar problems: inefficient industries, environmental devastation, and an unmotivated work force, to name the obvious. Unlike their neighbors, however, the Czechs started out debt-free with an industrial base that dates from before World War II.

But another reason for the Czech advantage is the stewardship of Prime Minister Vaclav Klaus, specifically his aggressive leadership and transformation strategies. Since the 32 elections, which brought to power a coalition government headed by his Civic Democratic Party, the Czech leader has launched two waves of voucher privatizations transferring a total of $11.5 billion in property and other assets from the state to its citizens. Coupled with low inflation and unemployment rates, conditions appear ripe for robust economic expansion. Because of such progress and prospects, the general public has embraced the new order. According to a recent Gallup survey (see chart), the Czech Republic is one of the few relatively developed Eastern European countries in which a majority--56 percent--prefers life in the post-communist era. (Chart omitted)

In the following conversation with Chief Executive in Prague, Klaus claims that transformation in the republic is complete. Not quite. Following are a few correctives.

* As noted in a nearby sidebar by Kalman Mizsei, an economic scholar with The Institute for EastWest Studies, the Czech Republic's performance in attracting direct foreign investment has been outpaced in some areas by both Poland and Hungary. (Sidebar omitted) "This clearly indicates something is wrong" with Klaus' DFI strategies, Mizsei says.

* The Czech private housing market is almost non-existent with a bureaucratic distribution of units and low, state-supported rents. Poland, Hungary, and even Russia are more advanced in creating liquidity in the sector.

* Klaus' voucher scheme may facilitate nominal privatization but may be inadequate when it comes to enterprise restructuring. Does the policy merely delay an inevitable day of reckoning?

* The Czech Republic has a law prohibiting state-owned companies from declaring bankruptcy. compare this with Hungary's far-reaching bankruptcy law and progress in developing a legal framework for capitalism.

* Klaus abruptly dismisses the idea of privatizing telecommunications despite spotty service in the republic and radical demonopolization of the industry worldwide. By contrast, Hungary has undertaken deregulation and forged links with outsiders such as Ameritech and Deutsche Telecom. Time will tell the superior approach.

To be fair, Klaus has much to tell the West about the snares of socialism and industrial policy. Working without a blueprint--explicitly rejecting the advice of Harvard's Jeffrey Sachs and others who have sought to guide Privatizations in Poland and Russia--Klaus and his cabinet have crafted a working market economy. Perhaps most important, they have managed to remain in power, advancing their republic's prospects for EC membership and placing it on the brink of what Klaus describes as a "post-transformation" phase.

"The heroes of this phase are not the reformed politicians such as myself," Klaus says with uncharacteristic modesty. "The entrepreneurs must go to work and make the new system succeed."

FIGHTING FIT

Your country has emerged from them the "Velvet Revolution" with a revamped economic and political philosophy. But in terms of putting those ideas to practical use, is the transformation complete?

The transformation process for post-communist countries such as the Czech Republic, Poland, and Hungary consists of three stages. …

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