The post-communist transition should not be misinterpreted

6. 11. 2013

I read with great interest Dalibor Roháč’s article (Roháč 2013) in the February 2013 issue of
Economic Affairs. This topic is worth discussing.

Economists behave rationally when they look for major economic events because for them they are an
alternative to controlled experiments in natural sciences. However, I am afraid that the fall of
communism, the collapse of such a large-scale experiment with central planning and abolition of
private property,[1] has not been used by economists in this way, or at least not sufficiently. It
deserves more attention.

The debate was evidently biased from the very beginning. Old exponents of the ‘comparative economic
systems’ theory came with their old preconceptions and vested interests; adherents of the
‘neo-institutional’ school used the debate for the presentation of their – very doubtful – views;
mainstream economists did not pay attention. The reformers, most of them economists, suddenly
turned politicians, were not believed – they were considered defenders of, if not apologists for,
their reform projects and were not taken seriously.[2]

As a result, new myths were created, new (or not so new) battles were fought, but the transition
from communism to capitalism is still not understood. The comparisons with similar events in the
West do not help very much. Unlike us, Margaret Thatcher, Britain’s former Prime Minister
(1979–90), did not try to shatter the constitutional foundations of her country. She tried to
reform the country in order to strengthen the kind of capitalism that Britain has always
represented. Our privatisation programme was to liquidate the entire old system for which state
ownership was the major vehicle of power.

It would be positive to use Dalibor Roháč’s article as a starting point for a new round of
discussion. I feel obliged to announce that I have a stake in this debate. I was Minister of
Finance and then Prime Minister of one of the transforming countries, the Czech Republic. I was
neither an uninvolved observer nor an economic agent participating in the transition process and
searching for windfall profits, unlike many Western ‘advisers’ who had such an ambition.

I was surprised to see that even such a sophisticated young economist (who because of his age could
not have participated in the old disputes) uses the terms ‘shock therapy’ and ‘gradualism’. All of
us who were involved in the process of transition have been arguing for years that such a choice
did not exist in this process – in my case probably most recently in a speech for the 2012 IIASA
conference in Vienna. Let me quote from it extensively:

• The overall systemic change is not an exercise in applied economics. It shouldn’t be forgotten
that the changes started whether we wanted them or not, whether we had the feeling that all
relevant, highly needed preconditions had been met or not. It was not possible to stop the
spontaneous behavior of millions of people, even if we wanted it, which certainly was not the case.
In addition to it, we knew that it was necessary to fill in the vacuum created by the collapse of
institutions of the old regime as soon as possible…

• Our critics did not see that there were transformation measures with objectively different time
requirements and that their introduction and implementation couldn’t coincide in time. The
institutional framework and the rule of law have to evolve, they can’t be ‘introduced’. Completing
them takes years or decades, not days or weeks. Patronizing us in this respect was a very
insensitive and thoughtless behavior on the side of some of our Western colleagues and of some of
our domestic ones…

• The crucial factor in transition was time. This issue has been discussed – at least at the
beginning – under the totally misleading heading: gradualism vs. shock therapy. It should be
stressed that both concepts are wrong – neither one has any meaning and any relation to reality.
Something else was important. It was necessary to put forward at one moment a critical mass of
reform measures in order to send a strong signal to the citizens of our countries that we were
serious and fully determined to transform the country. After that, the rule was – whenever there
was an opportunity – to implement any measure which was prepared. (Klaus 2012; emphasis in
original)

This is a fair summary of my position. Dalibor Roháč mentions – partly positively, partly
critically – Joseph Stiglitz, which is probably appropriate. This very productive and innovative
economic theoretician has a special gift for misunderstanding economic reality. It is a wrong
procedure to create a straw man – the shock therapy – and to accuse almost all authentic reformers
of being agents of the shock therapy concept and to herald a – never explained or defined – strategy
of gradualism. In the reality of transition, so-called gradualism was considered a non-transition.

Instead of defining it, Stiglitz repeatedly gives the example of China, but China has never been and
could have never been a model for anyone in Central and Eastern Europe. In our part of the world,
the political transition – parliamentary democracy, competing political parties, political freedom
– was done immediately after the fall of communism. In such a situation no sophisticated
sequencing, or gradualism of economic reform measures, was possible. The millions of finally free
people, fascinated by the arrival of freedom, wanted to live without being ‘planned’ or controlled
by anyone. In the case of Central Europe, there was no way to separate the economic and political
systems. Postponing the revolutionary abolition of the one-party system was impossible and nobody
wanted it.

We were also aware that gradualism creates new distortions and were particularly afraid of the
so-called spontaneous privatisation (into the hands of old communist directors of state-owned
enterprises). Such a result would have been, at least in my country, politically unimaginable.

Dalibor Roháč discusses also the role of the ‘Washington Consensus’, which ‘focused policymakers’
attention on variables that they could directly control’ (Roháč 2013, p. 66). This never came to
our mind. When we prepared our reform programme in the first months of 1990, the term ‘Washington
Consensus’ did not exist. It was, however, implicitly or automatically evident to us that

• we had to be in control of the macroeconomic situation by means of very cautious monetary and
fiscal policies;

• we had to liberalise prices and foreign trade as soon as possible;

• we had to fully deregulate and de-subsidise the economy; and

• we had to privatise the economy and set up all kinds of institutions necessary for the rational
functioning of a market economy.

Roháč’s article unfortunately repeats many myths about shock therapy; and what is – perhaps
paradoxically – even worse, he defends it against so-called gradualism. He says that the
gradualists did not present any tangible proposal. But I have to repeat that neither of the two
options – shock therapy and gradualism – existed or exists in reality. I have been arguing for
years that nothing like such a choice existed. It is useless to continue such a dispute. And it
would be wrong to confuse newly transforming countries with a false dilemma.

References

Klaus, V. (2012) ‘The Political Economy of Introducing Free Markets: Notes for IIASA Conference.’
14 January, Vienna. Available at https://www.klaus.cz/clanky/3022

Roháč, D. (2013) ‘What Are the Lessons from Post-Communist Transitions?’, Economic Affairs 33(1),
65–77.

Notes

[1] I accept that we use the terms ‘communism’ and ‘central planning’ very loosely these days. In
the 1980s we devoted a lot of time to the analysis of the real-world ‘Economy of the Socialist
Type’, which was very different from the hypothetical ‘Centrally Planned Economy’ discussed in the
economics textbooks. The power of central planners was in reality rather limited; in contrast, the
power of ‘planned’ enterprises was much stronger. Being fully absorbed by our new challenges, we
ceased to continue this type of reasoning. The role of horizontal – as opposed to vertical –
relations was in communist reality much bigger than is usually assumed.

[2] We would have accepted a serious question: who is the particular agent (designer, architect,
politician) behind such a fundamental systemic, institutional change? It is fair to ask: what did
the politicians (architects of reforms) maximise? The Public Choice School should tell us something
about it. Personal ambitions undoubtedly existed, political success was a goal, but the first steps
were done ‘altruistically’. Yet scholars have demonstrated heavy vested interests in this process –
they also wanted to be well-paid advisers.

Václav Klaus, The post-communist transition should not be misinterpreted, Economic Affairs, Volume
33, Number 3, October 2013.