This article was downloaded by: [Monash University Library]On: 06 May 2013, At: 02:25Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK

Europe-Asia StudiesPublication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/ceas20

Quo Vadis—homo sapiens? Results and alternatives forthe transformation strategy of the CSFRMilos Pick aa Institute for Forecasting, PraguePublished online: 06 Nov 2007.

To cite this article: Milos Pick (1993): Quo Vadis—homo sapiens? Results and alternatives for the transformation strategy ofthe CSFR, Europe-Asia Studies, 45:1, 103-114

To link to this article: http://dx.doi.org/10.1080/09668139308412078

PLEASE SCROLL DOWN FOR ARTICLE

Full terms and conditions of use: http://www.tandfonline.com/page/terms-and-conditions

This article may be used for research, teaching, and private study purposes. Any substantial or systematicreproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form toanyone is expressly forbidden.

The publisher does not give any warranty express or implied or make any representation that the contentswill be complete or accurate or up to date. The accuracy of any instructions, formulae, and drug doses shouldbe independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims,proceedings, demand, or costs or damages whatsoever or howsoever caused arising directly or indirectly inconnection with or arising out of the use of this material.

EUROPE-ASIA STUDIES, Vol. 45, No. 1, 1993, 103-114

Quo Vadis—Homo Sapiens? Results andAlternatives for the Transformation

Strategy of the CSFR

MILOS PICK

THE HISTORICAL DIMENSIONS of the transition in the CSFR from a centrally planned toa market economy, and the risks of failure of the prescribed therapy justify immediatediagnosis, even in spite of the brevity of the period observed. I would like, therefore,to draw attention to three current problems with' this transformation process: the mainresults achieved so far, their causes, and alternative starting points. I limit myself hereto the decisive substance of these problems, even at the expense of oversimplification.

Where we are

We find ourselves at the end of the initial and the beginning of the second decisivephase of the transformation process, at a critical crossroads, which other countrieswhich have adopted a similar strategy have already passed. The decisive results of theinitial phase have been the following.

1. After liberalisation of most of the domestic market and foreign trade, imple-mented in one jump, a provisional nominal equilibrium is being established in boththese areas. These short-term tendencies towards stabilisation (curbing of inflation)can be seen both on the domestic market (where after the shock wave of the priceexplosion, the rate of price increases has settled at a new level) and in externaleconomic relations (where we can observe a developing equilibrium of the currentaccount of the balance of payments in convertible currencies, accompanied bymaintenance of the fixed exchange rate of the crown and convergence of the 'black'rate to almost the same level). This result, however, was obtained only after a rise inthe debt in convertible currencies up to one-sixth in comparison with the beginningof 1991.

2. This nominal equilibrium is developing, however, only on the basis of destruc-tion of the real economy. The immediate, sharp real adaptation of the economy isinvolving aggregate decline—both quantitatively and qualitatively.

The quantitative rate of decline—its magnitude and length of duration—is alreadyendangering a substantial part of the economic potential. In the fourth quarter of 1991the decline in gross domestic product reached 25% in comparison with the precedingyear, and the decline in national income was 29% and real expenditure of population33%. Unemployment reached 7% in December 1991 (in the Slovak republic 12%)and an additional 15% of the labour force have been retained for the time being in

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

104 MILOS PICK

enterprises at the cost of a decline in the productivity of labour. All this creates, initself, the basis for further decline, which, with no change in policy, may beintensified by the dismissal of the 'unemployed' retained in employment and thethreat of enterprise bankruptcies.

The main point is, however, that this decline does not have a beneficial or salutaryeffect—it does not generate the conditions for future prosperity. Instead of an upwardrestructuring towards more skilled and sophisticated industries, we observe, on thecontrary, a structural downward trend; a rise in the share of primary heavy industriesin exports, production and profits—industries which are demanding in terms ofcapital, energy, materials and ecology: in the fourth quarter of 1991, for example, theyearly rise in their share of total industrial production amounted to 6 percentagepoints.1 At the same time, the private sector remains small.

In the fourth quarter of 1991 the previous excessive energy and materials consump-tion of the economy continued to rise by about 3% per annum (even though it wasalready approximately 50% higher than in the developed world); the disproportion-ately low productivity of labour declined by a further 15% (although it was still onlyhalf the level of the developed world, at most); investment in the antiquatedproduction base and infrastructure declined by about 40%. The decline of imports(30-40%), is especially important although imports amounted to only about one-sev-enth (per capita) of the level in small, economically developed European countries.This means the country is closing itself to the outside world even more, especially inthe import of technologies.

We cannot say, therefore, that what has been happening is an inevitable 'discardingof the inefficient burden' and the initiation of the process of rationalising theeconomy; it is rather the start of a 'retreat'.

3. The contradictions between nominal stabilisation and destructive real adaptation(overall recession) of the economy create a threat of instability for the future. Priceshave stabilised at a level as much as 80% higher than at the beginning of 1990; thisrise has almost completely wiped out the influence of the nominal devaluation of thecrown, which also amounted to ca. 80%; the real devaluation has thus already beenalmost entirely cancelled out by this inflationary shift. The discrepancy between theexchange rate and the purchasing power parity, which temporarily increased fromdouble to almost quadruple, has now returned again to double.2 In those circum-stances, however, equilibrium in foreign trade could only be maintained by agovernment policy of regulation and subsidy. The contemporary equilibrium in thecurrent account now emerging again in the post-devaluation period is based exclu-sively on macroeconomic restriction of domestic aggregate demand (without thesupporting influence of the devalued exchange rate).3 Revival of demand by modera-tion of the restrictive macroeconomic policy alone (without a comprehensive changeof economic policy) would therefore endanger, in the first place, the balance ofpayments—it would weaken exports and suck in imports.

Fortunately, the government—in spite of stressing the justification of this restric-tion—has already acceded to pressure to moderate it and after the middle of 1991 ontwo occasions pumped the sum of 50 billion crowns into the economy. This, however,was not only too little too late, but these were only isolated steps. Even these 100billion crowns would have raised the demand for imports by about 20 billion crowns

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

THE TRANSFORMATION STRATEGY OF THE CSFR 105

(ca US$ 0.7 billion) even with an unchanged propensity to irhport. In the presentsituation there is a probability of the so-called 'East German syndrome'—a criticalrise in demand for imports of Western goods. A mere revival of aggregate demandis more likely to raise imports and lead to a deficiency in foreign trade, than to arevival of domestic supply. In addition to this, with the prevailing monopolisticstructure of production, even a revival of aggregate demand for domestic productswould not lead to a revival of domestic supply, but more probably to inflation.

Even so, a revival of aggregate demand (by moderating the macroeconomicrestriction) is unavoidable, not only for economic but also for social and politicalreasons. The extent of the decline in living standards and sinking confidence owingto its inevitability (surveys of public opinion show this) indicate that the population'sstores of both goods and patience have their limits. The threat to the social andnational consensus (the less competitive economy of the Slovak Republic is affectedmuch more drastically) has already been revealed. The slogan 'hold out' is merely arhetorical solution. There is no realistic alternative to a transition to a policy of revivalof demand. The choice is only whether the revival of the economy will be executedin good time and rationally, or under pressure and irrationally.

The contradiction between the.necessity to revive the economy and the impossibil-ity of doing so in an isolated way and in the framework of the existing transformationstrategy confines the economy within the pincers of the 'reform trap'. This is notunique to the CSFR—this critical crossroads was also reached at the 'half-way stage'in the transformation process by other less developed and insufficiently competitivecountries which chose a similar, standard strategy of transformation and stabilisation.The attempt to break through this vicious circle by the revitalisation of demand(mostly only under spontaneous, uncontrolled pressure) in the framework of anunchanged strategy ended unsuccessfully in the majority of cases with a transition tolong-term stagflation. The recession was not overcome in the second phase but wassupplemented by a new inflation. The unsuccessful countries of Latin America, inparticular, ran into such an impasse, and probably even Poland is in danger offollowing this trail. The former GDR has had to be saved with help many timesgreater than the Marshall plan gave to the whole of Europe. The long-term economiccrisis in Yugoslavia culminated in war.

Why are we there?

Among the causes of the recession in the Czechoslovak economy we must alsoundoubtedly count the 'import' of difficulties from the outside world—mainly fromthe countries of the former CMEA. This, however, constitutes only a minor part ofthe total causes—the decline of exports to these countries represents, at a maximum,about one-third of the decline in Czechoslovak aggregate demand. Moreover, eventhis is not a fatally determined, wholly external factor. The fact that our exports to theformer CMEA countries has been gradually and partially reallocated to the Westernmarket economies (on account of a downward restructuring), is proof that even thiscan be influenced by domestic policy. Even the difficulties imported from thesecountries are not completely alien; they represent not only the consequences of the

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

106 MILOS PICK

crumbling of an unviable system but also the consequences of common faults in itstransformation.

The main causes of the general recession in the Czechoslovak economy are ofdomestic origin, whether concerned with the 'heritage of the past' or the contem-porary strategy of transformation. The heritage of Czechoslovakia means that it isneither a developed nor an underdeveloped country, but a hybrid.

On the one hand, there were relatively favourable initial conditions for transforma-tion: on the basis of international comparison the country's economic performancewas at least medium, as were its skill levels and living standards; and at the same timelabour was relatively cheap,4 and inflation and foreign debt low.

On the other hand the country had several handicaps: an exceptionally low level ofparticipation in foreign trade, especially with the developed world (the 'closed'character of the economy) and severe backwardness in the technical standard andquality of its products and services, which was most serious in the most sophisticatedindustries, and was an insurmountable barrier to exporting.

Figure 1 shows the curves of competitiveness (cost per dollar earned) of thecountry in comparison with the world level and in relation to the degree ofsophistication of different industries. Commodities are represented by the branchaverages for simplification. The sophistication is expressed by the share of brainwork-ers.

The straight line Pw indicates world prices. The curve Pd indicates domestic prices(costs). A country in an intermediate stage of development (CSFR) is shown by asolid line. A less developed country is shown by a line which is dashed on the leftand solid on the right. The upper lines (P'w, P'd) indicate the situation after thedevaluation of the domestic currency.

An intermediately developed country has on the right side the disadvantages ofunderdeveloped countries (the steepness of the curve expresses the backwardness ofthe technical level and quality of the products of this country in comparison with theworld and the declining price elasticity of supply, unsurmountable by competitivenessin prices and costs obtained by devaluation). On the left side this country has thedisadvantages of developed countries (here it competes with the low wages of theunderdeveloped countries).

With a standard devaluation solution an intermediately developed country openingto the world has comparative advantages only in the field of intermediately skilledheavy primary production. The consequence of this is a destructive restructuring witha decline in terms of technical qualities and skills.

The record degree of nationalisation and monopolisation in the economy (whichmeans that producers are very slow to adapt) constitutes a handicap. The lag incompetitiveness also had national dimensions—it afflicted the economy of the SlovakRepublic to a greater degree3 (the rapid overcoming of backwardness in relation to theCzech Republic in the past two decades was only quantitative).

The cardinal error of the standard strategy of transformation which has been chosenis, however, that is does not take sufficiently into consideration the non-standardconditions prevailing in the country, especially the following.

1. The premature immediate opening of the economy to the world by theliberalisation of foreign trade did not allow an adequate period of adaptation (perhaps

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

THE TRANSFORMATION STRATEGY OF THE CSFR 107

P'd,•„ /

Eto<D

"S•a

8

45-

40-

35-

Prices:x before devaluation+after devaluation

% intellectual labour

I 1°1 Ii l ls «• • • • • • •

11(3 0) to

w m S « "r

I

y ra a o o c JS£ o.j3.i= c a m

co

8• • •

FIGURE 1. Cost per dollar earned.

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

108 MILOS PICK

at least three to five years, mainly for more complex, sophisticated production, wherewe find ourselves less competitive in a demanding world market than we are in moresimple primary production). Czechoslovakia has, moreover, opened its economy todeveloped countries even more than they have to it,6 although the aim should beasymmetry in the opposite direction.

The paradoxical 'punishment' for the premature opening of an uncompetitiveeconomy is not only qualitative and quantitative decline, but 'closing' even further tothe world (decline of imports).

The successful countries in the postwar period, Western Europe and Japan, and inthe 1980s the 'four tigers' of Asia, proceeded differently in their developmentphase—they liberalised initially only their domestic economy, but 'protected' ittemporarily and gave it time for adaptation by means of an anti-import and pro-exportselective and interventionist policy, and they liberalised their foreign trade only at acertain level of competitiveness (when they had already achieved about half of theperformance of the USA, and the discrepancy between the exchange rate and thepurchasing power parity amounted to at most 1.5 times). Even Chile and Mexicoachieved their success by supplementing and correcting their standard strategy ofpremature opening to the world by temporary application of a vigorous structural(anti-import and pro-export) interventionist policy.

2. The restrictive macroeconomic policy was no doubt necessary after the liberal-isation of prices (even if foreign trade had not been liberalised simultaneously) tomoderate the inflation triggered by this measure, but it has been too restrictive. Thegrowth of the money supply (bank credit) in particular lagged approximately 25%behind the price explosion in the first quarter of 1991. One-third, perhaps, of theeffect of this was the explosion of insolvency, with the extension of uncovered, forcedcredit between enterprises. Simultaneously—perhaps, two-thirds of the effect—therewas a deep sales crisis and real decline in the performance of the economy.7 Theinteraction of all these processes has brought insolvency up to 80-85% of enterprisesand has thus shifted the 'line of extinction' to an extreme and uninformative levelwhich cannot represent a valid measure of their behaviour, adaptability and viability,but is primarily an expression of macroeconomic elimination of the space foradaptation.

The fiscal restriction also has a boomerang effect. With reduced enterprise taxcharges as a result of recession, the economy cannot sustain the budget sphere withoutdrastic cuts (social consumption declined in 1991 in real terms at a rate of 10% perannum), or deficit financing, or both.

At the same time, the speed of abolition of the interventionist policy (structural andregional) was excessive; it was done without allowing the appropriate time foradaptation. Thus the consequences of the liberalisation shock were seen even moreacutely in the destruction of agricultural production and of the economy of the SlovakRepublic, where the relative dependence on subsidies was greatest.

3. The absence of an effective policy aimed at accelerating the creation of acompetitive environment by 'importing' competition, at least from countries whichhave similar degrees of competitiveness (where the immediate opening of theeconomy would not endanger it), has meant that no adequate external competitivepressure on the adaptability of enterprises (on the adaptability of supply) is being built

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

THE TRANSFORMATION STRATEGY OF THE CSFR 109

up. No use was made of positive foreign experience in creating at least this externalcompetitive pressure in the period before privatisation, by a general separation of stateenterprises from the state (from the state budget) and by their commercialisation (i.e.their immediate transformation into commercial, mostly shareholding companies) andby an adequate anti-monopoly policy.8

4. Privatisation, which should create the internal preconditions for adaptability (byownership motivation and by an inflow of capital and know-how) can only be agradual process. Moreover, the strategy of large-scale privatisation based primarily onthe voucher method9 does not give even the prospect of any guarantee of creatingthese decisive preconditions, does not sufficiently support credit privatisation so as tocreate an entrepreneurial middle class, following the criterion of quality of theentrepreneur (demanding repayment of credit and therefore future efficiency), and itstrives to minimise employee participation—which throughout the world generatescommitted employee ownership. This strategy is not even credible enough to attractforeign capital—in 1991 the influx amounted to only US$ 0.6 bn, whereas at leastUS$ 2-3 bn yearly are needed.

Moreover, during the period before privatisation this strategy neither creates theconditions for consolidation of the enterprises which are not yet privatised, nor foreffective control of the privatisation process. Crime is penetrating into the smallprivatisation (laundering of dirty money, a new explosion of 'grey' and 'black'economy, extensive tax, customs duties and exchange control evasion by the newprivate entrepreneurs, while big privatisation has been preceded by an explosion ofinsider trading by enterprise management.

The present strategy of large-scale privatisation seeks as its starting point a'lightning privatisation' in 'waves' (mainly on the basis of vouchers), even at theprice of almost uncontrollable bureaucratisation,10 with all the risks of irreversiblelosses of potential economic assets and illegal enrichment. Privatisation has degener-ated from a rational economic process into a political power struggle which is morelikely to seal economic collapse than avert it.

The unsuccessful and erroneous strategy adopted is domestic rather than importedin that, while it copies uncritically the standard strategy of the International MonetaryFund, it does so in spite of domestic conditions, which are not standard. The strategydoes not, therefore, create the necessary preconditions for the positive marketadaptation of the economy—neither adequate time and space for adaptation, nor theexternal and internal preconditions for adaptation. Limiting the goals of the strategyto privatisation (even if it were to be rationally and successfully executed) meanssupplying only one condition for a successful adaptation in isolation: admittedly, thiscondition is indispensable, but by itself it is not sufficient for the overall success ofthe transformation process.

How to proceed further

The starting point cannot be an 'ostrich' policy of strong rhetoric, minimising thegravity of the current critical state and its causes, and refusing to make the inevitableand substantial correction to the present unsuccessful strategy that is needed. Belatedand partial isolated measures may, on the contrary, prepare the way to 'spontaneous'

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

110 MILOSPICK

correction—enforced and irrational—leading to stagflation and political and constitu-tional destabilisation.

The time is ripe for a fundamental change of strategy—for a transition to analternative strategy in the form of a comprehensive programme of consolidation. Itsnucleus could probably be constituted by four main policy measures.

1. Switching to a macroeconomic policy of revival of aggregate demand, usingmonetary policy not only to cure the insolvency problem but, above all, to moderatecredit restriction by lowering the interest rate further and " thus creating theprecondition not only for adequate credit expansion but also for full use of theguidelines agreed for the increase in salaries,12 of which only about half is being used.At the same time, at least the so-called 'profit salaries' (participation of employees inprofit) should be liberalised, allowing greater flexibility in the market—whereas a fullgeneral liberalisation of the so-called 'cost salaries' (which are part of costs) wouldbe premature in this revival phase and could trigger wage-cost inflation. These stepsshould make it possible to revive both consumer and investment demand adequately.

At the same time state budget expenditure for social consumption should beincreased at least enough to prevent decline in real terms, preparing and implementinga programme of reform and development of education13 as a main precondition forfuture comparative advantages. A corresponding programme of modernisation anddevelopment of the infrastructure (mainly rail transport and the highway and telecom-munication networks) should also be pursued.

2. Simultaneously protecting the revival of aggregate demand by means of avigorous structural policy, based mainly on the support of export expansion accordingto uniform criteria of export performance14 and sophistication15 (by credits onadvantageous terms, insurance, tax allowances, and even by liberalising 'cost salaries'for export-efficient enterprises only). This should be accompanied by protectionagainst imports (by an import tax, a selective increase in customs duties16 andnon-tariff measures). Also, enterprises which do not yet attain these parameters butcan offer a realistic programme for their attainment in the near future (during theadaptation period) should be given incentives based on future effects. Selectiveintervention in such ways should minimise the scope for subjective, individualisedinterference on the part of the bureaucracy.

As far as possible Czechoslovakia's substantial prospective comparative advantageand position in the markets of the East, including the region of the USSR should bepreserved (taking advantage also of the tripartite Western help to this region throughreimbursement of our exports on the basis of the Dienstbier initiative).

Similarly, regional policy must be used to overcome the lesser competitiveness ofthe economy of the Slovak Republic during a reasonable adaptation period, irrespec-tive of the future constitutional arrangement17 (this is a crucial test of Czech economicpolicy).

The government should also consider the introduction of a charge in foreigncurrency for the entry of every foreign tourist, with the aim of partial elimination ofthe discrepancy between the purchasing power parity and the exchange rate (accord-ing to our estimate the charge should amount to about US$ 10, regardless of theduration of the stay, so that longer stays would retain their advantage), at least for atransitional, politically sustainable period (perhaps two to three years, to enable us to

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

THE TRANSFORMATION STRATEGY OF THE CSFR 111

ask for understanding, especially from neighbouring countries). With the number oftourists already exceeding 65 million, the state treasury would recover US$ 0.65 bnannually of the amount which has been escaping us unnecessarily up to now (with ourpresent attractiveness for tourists we do not need to underbid in terms of price).

The aim, therefore, is to correct the undesirable effects of the premature openingof the economy to the world by the means of a transitional interventionist policy(which would, as far as possible, preserve the internal convertibility of the crownalready attained—i.e. as much as possible without a return to exchange regulation ora plurality of rates). Without this, it is probably not possible to find a solution whichwould be simultaneously both balanced and not destructive.

3. With the aim of speedy creation of a competitive environment, it is desirable toinitiate a payment union with Hungary and Poland and to fight the inflationaryepidemic by mutually floating exchange rates of the national currencies.

4. It is necessary to change the present dangerous strategy of big privatisationcompletely. It is not enough to postpone the application of the voucher method; itmust be abandoned completely. As an immediate measure of pre-privatisationconsolidation, it is probably unavoidable to separate state enterprises from the statequickly (commercialisation) by transforming them into corporations and shareholdingcompanies, for the time being with majority state ownership but at least with aminority of real owners—employees (perhaps 15-20%), and eventully public funds(social, health, municipal... perhaps up to 10%) as in Hungary (and also partially inPoland). This may also be the only effective form of control over the furtherprivatisation process, a barrier against an explosion of 'insider trading', and a way tosalvage the property base of production capacity from the threat of completedisintegration, which is perhaps not yet within the powers of the bureaucracy (evenif it were 'untainted'), not even of the people 'on the street', but probably is in thehands of employees whose 'sheer survival' is at stake.18

These measures could be followed by a speedy, but by necessity gradual processof economically rational privatisation, based mainly on the broad use of privatisationcredits, on eventual further enlargement of the proportion of employee and manage-ment shares (including management buy-outs) and on participation of foreign capital.For the foreign capital, advantageous conditions should be created in harmony withthe programme of structural policy (especially with regard to the adaptation of moresophisticated production and services).

Success of the consolidation programme could, in the short run, make it possibleto move from a macroeconomic policy of revival to a policy of moderate growth inthe economy, i.e. to a resumption of growth in real wages (real incomes of thepopulation), which would, however, be less than the growth in productivity. Thiscould provide the basis for a rise in export performance and also for paymentsequilibrium with a simultaneous gradual hardening of the exchange rate closer to thepurchasing power parity. In this process, it would probably be possible and advanta-geous to strive for at least a restoration of the level of real wages from the periodbefore November 1989 with a maximum delay of two to three years (whereas withan unchanged strategy the mere attainment of this goal could be prolonged, perhapseven by a whole decade).

Coverage of the costs of this operation (revival and growth) cannot come only from

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

112 MILOSPICK

the traditional source—savings. In an economy with profoundly underused productionpotential (as a consequence of the recession) it is evidently possible to use also theinstrument of deficit financing and credit emission for the purpose of starting arevival, on condition that the balance of payments equilibrium be maintained(especially by an adequate intervention policy) and the barrier of export performancebroken and a wage-cost (or even devaluation-cost) inflation spiral be avoided.19 Butthe main source must be created by the revival itself (or it must lead to arenewal—even if in another structure—of the sources hitherto swallowed up by therecession). A supplementary source could be foreign credits, but in principle exclu-sively for development projects capable of repaying them, and credits to the formerUSSR to cover its imports from the countries of Central and Eastern Europe(especially from the CSFR, Poland and Hungary under the Dienstbier initiative). Asfar as possible there should be no more reliance on short-term 'aid for changing thesystem'. An initial consolidation of the economy could also attract foreign investors.

Conclusion

Under non-standard conditions, the standard strategy is breaking down. A shock in aneconomy which is too backward and uncompetitive does not lead to its immediaterestoration to health, but instead leads to hopeless destruction.

On the other hand, however, it immediately sweeps aside simplistic, dogmaticmyths:

• if the discrepancy between the exchange rate and the purchasing power parity is toogreat, the immediate opening of the economy does not 'import' world relativeprices but creates a peculiar mix of two considerably different price levels (theexpensive world level and the cheap domestic one) with pressure not only onequilibrium but also for downward restructuring (see the distances between thestraight lines Pw and the curves Pd in Figure 1);

• under such conditions, macroeconomic restriction does not lead to a restoration ofhealth but to overall destruction (recession) with the risk of long-term stagflation;

• privatisation—in contrast to nationalisation or confiscation—cannot be a single act,but only a gradual process of effective change in behaviour (adaptability) of marketsubjects, and is in itself, no doubt, an inevitable but not a sufficient condition fortheir rescue and adaptation;

• the changes required to overcome economic and technical backwardness (uncom-petitiveness), coupled with systemic changes (transition to market economy) can beneither painless nor quick; they can only be long-term—and the illusion of a shockcan only prolong the process;

• the social costs of the transformation are not in themselves a measure of itsradicalism nor of its effectiveness; they can be, on the contrary, a sign ofmismanagement of the transition; they must therefore not only not be too high, butespecially they must not be susceptible to doubt about their justification—this couldendanger the social and political stability of society, which is a main preconditionfor a successful transformation.

The initial euphoria of economic theory, politicians and the population has quickly

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

THE TRANSFORMATION STRATEGY OF THE CSFR 113

been replaced by disillusionment—in this way the shock is really effective. Thus, atthe 'halftime stage' of the transformation process, we find ourselves confronted witha fundamental choice between alternatives. Our decision will determine whether thishalftime turns out to be a point of reversal to consolidation and rational transforma-tion of our economy and society, or whether it will be only a half-way point indecay—whether from the debris of apathy created by the centrally planned economythere will really emerge, as the main player of an economically successful andsocially sustainable transformation of economy and society, a committed homoeconomicus and not a homo destructivus whose ghost is already wandering throughthe countries of Central and Eastern Europe as a product of unsuccessful strategies.

This is also in the interest of the West, and of the whole world community, becausethe deep crisis of our countries is already weakening the stability of the worldeconomy and could be reflected politically. In fact the economic and political 'bills'for failure of this transformation would have to be paid by all of us together.

The West could probably still help to avert a collapse. The most important helpwould be a unilateral (asymmetrical) opening of Western markets to our countriesand, above all, a reappraisal of the inadequate transformation and stabilisationstrategy of the International Monetary Fund so that our countries could as much aspossible help themselves. Under these conditions, financial help could only becomplementary and should be designed mainly to avert the chain reaction from thedisintegration of the economy of the USSR (the 'three-way-help' according to theDienstbier initiative) affecting development programmes and the transfer of moderni-sation capital and especially of know-how.

Institute for Forecasting, Prague

An abreviated version of this article was published in Hospoddrske noviny, 13 and 14 November1991.

Now, a year after this article was written, all dates should be actualised. However, the overallpicture would not change much. In 1992, the Gross Domestic Product remained approximately at thesame level as in the fourth quarter of 1991 (about one-quarter lower than in 1989). The disruptionof the national consensus between the Czech and Slovak republics leads to the cutting of CSFR. This,together with the postponed bankruptcies, could deepen the crisis of the economy rather thanrevitalise it.

1 The share of primary industries (those producing fuel, energy, metal goods, chemicals, paperand building materials) in total industrial production rose to 46.4%, compared with 40.8% one yearearlier.

2 The discrepancy between the exchange rate and the purchasing power parity represents anatural consequence of the backwardness (uncompetitiveness) of the country. It is impossible toeliminate this difference without overcoming this backwardness. It has, however, unavoidableconsequences—it lowers the comparative advantages of the country (such a country is partially'giving itself to the outside world). An artificial widening of the discrepancy by devaluationaccompanying a premature opening of the country, however, multiplies this 'giving' (the year on yearworsening of the terms of trade in 1991 exceeded 22%).

3 The recession (destruction of supply) achieved by suppresing demand instead of 'giving' to theoutside world constitutes an alternative consequence of premature opening of the economy.

4 In comparison with the developed European countries, the average Czechoslovak salary in1989 amounted in real terms to around one-fifth to one-third at the most and nominally (at thecommercial rate at that time), to around one-tenth to one-sixth whereas in the post-devaluation period

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3

114 MILOSPICK

in the fourth quarter of 1991 the latter figure was around one-twentieth to one-tenth (the hourly labourcosts including taxation amount to about one-half).

5 While in the Czech Republic in 1969 12% of enterprises displayed an above-average exportperformance (with an 'export quota' to market economies exceeding 20% of their total production),only 5% of enterprises in the Slovak Republic registered the same achievement.

6 In the 1980s the tariff protection of the European Community against imports from the CSFRamounted on average to 24% (customs duties 9% and import tax 15%), while our protection amountsnow to 7% on average (customs 5%; the temporary import surcharge of 15% concerns only consumergoods and therefore on average—in relation to all imports—it represents only 2%. The EC also fixesnon-tariff (quantitative) limitations on imports.

7 The fact that the credit limits (and also by analogy the salary limits) were not fully usedrepresents only the effect, not the cause. The cause lies in the unwarrantedly high interest rate (itamounted to up to 24%). In a period of price explosion, it is not possible to strive for a positive realinterest rate; instead the flight of deposits should have been avoided in a similar way to that adoptedin the case of monetary reform sui generis depreciating the currency (by partial confiscation).

8 The Bureau for Economic Competition is even passively observing continuous price dictationby monopolies in the food industry.

9 Free privatisation by the voucher method will create, in its first stage, extremely dispersedshare ownership with minimal influence on the management and behaviour of enterprises; in thefollowing phase it will create, on the contrary, the risk of a selling of shares and concentration ofownership decision making in the hands of small control groups, coupled with an eventual andcompletely uncontrolled entry of foreign capital, and also with strong inflationary impulses (conver-sion of domestic savings to 'hot' consumer demand: at the same time the deposits of the 'millionaireswho made their money during the period of normalisation' amounted approximately to 100 bn Kčsin 1989).

10 In the 'first wave' of privatisation, after a few weeks, a central decision was to be made onsome 10 000 projects (based on the so-called entrepreneurial strategy) for individual enterprises.Never in the history of Czechoslovak central planning did the centre decide the futures of thousandsof enterprises individually (for that purpose it had a hierarchical pyramid of institutions, which hasbeen abolished)—especially in such a short timespan.

11 Even with completely stable price levels in December 1991, the average nominal (and real)interest rate for credits to enterprises amounted to 4% and the interest rate paid on bank deposits was8.0% (a margin of almost 16%).

12 This could immediately moderate the decline in real wages from the current value of ca.30%to ca.20% in relation to 1989.

13 Such a programme should probably extend obligatory school attendance to 10 years in thenext few years and in the course of one decade should aim for an expansion of the number of studentscompleting full secondary education to perhaps two-thirds of their age-group and of universitystudents (postsecondary students) to perhaps one-third of their age-group.

14 With the use of experience from, for example, Australia and New Zealand (measure of aboveaverage growth rate of exports) or France (measure of export performance, i.e. share of exports inoutput).

15 With the use of experience from, for example, Mexico and Venezuela (measure of theproportion of value added in output).

16 The restructuring of the custom tariffs now under consideration, with an average rise to only5.8%, can hardly achieve this.

17 The European Community is helping its 'South' in a similar way, even though it is not yeteven a confederation.

18 At the same time it is in the interest of the majority not to oppose the dismissal of superfluousemployees.

19 A macroeconomic policy giving preference to revival can attain this goal without triggeringa new wave of inflation provided that it observes not only the conditions stipulated here but also thatit acts only within the framework of the whole consolidation programme considered here. Even soit will be more sensitive to inflationary risks, especially in the initial phase of the reversal. For thisreason, it would probably be advisable to postpone further measures which directly provokeinflationary impulses (especially further steps towards liberalisation or more speedy removal ofsubsidies than can be compensated by lowering costs).

Dow

nloa

ded

by [

Mon

ash

Uni

vers

ity L

ibra

ry]

at 0

2:25

06

May

201

3