In Czechoslovakia, they resolved that if privatisation needed to be done, it had to be done. They considered it as the first step towards transforming the economic system.
According to Dr Vaclav Klaus, once a finance minister, prime minister, and president of the Czech Republic, privatisation at a vast scale was done and it proved to be the first decisive step. It was like crossing the Rubicon. No doubt, the political costs were unavoidable but it had to be done and needed to be done as quickly as possible.
There were other aspects that assumed a number of things to be part and parcel of privatisation. The people in Czechoslovakia and other countries also (like Pakistan) believed that in a market economy as compared to the command economy or centrally planned economy every firm and economic activity had to succeed and they attached an undisputed efficiency with every private firm.
Whereas as is evident that is not true even in a major, stable, developed economy. And of course, Dr Klaus says it is much less true in an economy in transition with a dramatically changing economic environment, in competition with much stronger partners from the rest of the world, and without sufficient experience.
As is said, “There are no free lunches,” Dr Vaclav Klaus reminds, likewise, there are no ‘free’ economic transitions. The ‘economic transition’ is a very costly process. It’s an investment and usually, like any investment, has costs and benefits and the business people know that usually when you make an investment, you pay the costs first and you may get the benefits with a considerable delay.
Hence, according to Dr Klaus, the transition from communism to a free society was an investment in certain respects, and the costs were really enormous.
So not only while transitioning from a command economy to a market economy has its costs, in converting a mixed economy into a free enterprise economy has its price also.
Dr Klaus makes a mention of the size of the costs his country had to go through. According to his estimates, in his country they were lower than in other countries. In the first three years of transition, they lost one third of their industrial output – one third.
As happens usually, if we take all of the business people, two would succeed and one would collapse. They lost one quarter of their agriculture output – one quarter – and they lost one fifth of their GDP - and it was lower than in most of the countries in transition.
No doubt, in Czechoslovakia too, transition and privatisation were connected with many business failures and the one who was blamed was the government, of course, not the individuals owning and managing those firms. Dr Klaus tells, it became fashionable to argue that the failures were caused by unsuccessful privatisation and an insufficient legislative and institutional framework.
Dr Klaus admits, both privatisation and the formation of new legislation of market accompanying institutions was as imperfect as any human activity. But the main problem, in his opinion, was that the citizens were not prepared to accept or to live with the phenomenon of a business failure, both at micro and macro level.
As far as foreign help in the process of transition is concerned, Dr Klaus tells that sometime back he was asked to give a speech together with German economists to compare the transition and transformation of Germany in the 1950s and the Czech Republic in the 1990s.
He flashes back, it was a very interesting exercise. One of the differences was really the fact that there was huge foreign help to Germany. We didn’t get it, we have really got nothing in the last ten years, and we didn’t ask for it. The role of the rest of the world in this respect was really zero.
Regarding foreign help, Dr Klaus is very blunt: I think that the typical foreign help was sending would-be advisors and consultants. It became one of the most profitable businesses in the 1990s – to become a consultant and advisor in the transforming societies.
The recommendations of these advisors and consultants weren’t useful and not very good. We know about the troubles that were experienced in South East Asia in the second half of the 1990s. Dr Klaus says, it has become an accepted truth that the policies of the International Monetary Fund (IMF) were a tragic mistake for all what happened in countries like Indonesia, Malaysia and elsewhere.
And, he goes on: I remember I made a well-known statement that was repeated many times, and Milton Friedman called it ‘Klaus Law.’ I was forced some eight or nine years ago in the World Bank in Washington to accept, when I was still the Minister for Finance, a foreign assistance loan, a technical assistance loan. I said we are not interested in a loan for inviting consultants and advisors.
If you are ready to give us a loan to build something, some infrastructure project we can discuss it, but a technical assistance loan? I am not interested.
Lesson for Pakistan: Wiping out the presence of the government from the domain of business, that is, privatization, has its costs and the costs will have to bear, because there is no perfectly infallible method is available to privatize a state-owned-enterprise. That amounts to saying that in altering an economic system, mind the privatization as the first step and be ready to bear the costs of that Change.
[Note: This article is based on a lengthy interview of Dr Vaclav Klaus.]
