the free market prevail!
The financial policy of Václav Klaus
The former Minister of Finance and current Prime Minister of Czechia is
in the west considered a man of reason, "intellectual pragmatist"
and "symbolic figure for the transformation from planned to market
economy." In 1991 he was elected "Minister of Finance of the
Now, his policy, which finds vigorous acclaim in the west, is jeopardized
due to the secession of Slovakia and the problems this is bound to create.
In view of this situation Mr. Klaus financial policy is certainly
worth a more detailed obsevation.
Restrictive monetary policy
From the very beginning of his career Klaus has clearly
defined his aims: "What our monopolized companies are committing
is terrible." In order to change this situation on macroeconomical
level he considers a decided restrictive monetary and budget policy indispensable.
That is, he wants to put pressure on these companies by rigorous measures
for the allocation of credit and subsidies that must be cut down radically.
It is furthermore imperative to establish the legal basis for various
forms of property as well as laws which will stimulate free competition.
What does so-called restrictive monetary policy imply when related to
a »real socialist« economy?
After all we are not talking about anything like a capitalist economy
consisting of both a national and a private sector. The national
sector in western economies serves several purposes. Here the state covers
the dead costs of capital, the infrastructure of society. The government
sees to it that goods, commodities and the working population can be forwarded
smoothly. All this is essential for any private business ventures. National
institutions and companies in western Europe therefore build and maintain
roads, highways, railway systems and so on. (The USA due to historical
reasons have never developed this national sector.) Likewise the
gouvernment supplies means of communication, a telephone network, mail
delivery, as well as facilities for banking that enable swift transfer
It may also occur, like for example in Austria, that a nation decides
to establish a nationalized primary industry, which supplies the
private industry with off-price energy and steel, and so contributes to
the competitiveness of Austrian products on the world market.
The nationalized sector in capitalist states therefore relies on private
industry and at the same time serves it, therefore the responsible
politicians are not by all means applying the same standard to the national
sector, as to the private. If in such a western state there is or should
be de-nationalization, privatisation, this can be considered as an offer
to national or foreign owners of capital to buy a share of a well equipped,
brand-named production, and to continue and perhaps modify this production,
this time according to strict profit calculation. If this enterprise belongs
to the "key-industries" its new owner(s) can usually count
on further subsidies. If it produces a base whose importance has waned
due to technological progress, some of these enterprises will be closed
down, as it happened to a number of European steel plants in the 80ies.
These things usually take place when a state can be positive that his
economy can take it.
In the economies of »real socialism« there are no two sectors,
state and economy are one. If Klaus therefore wants to "put
pressure on his monopolized companies" this means that he hits the
entire economy of former Czechoslovakia. He wants to force the appliance
of profit calculation and a production that meets his standards by withdrawing
of subsidies. This is an unusual procedure.
Normally, as we know, enterprises are made competitive by investments
into them, by supply of means. What kind of companies is Klaus
confronted with to consider the opposite method the correct one?
The companies of socialist Czechoslovakia were not destined to produce
for the world market, but to provide the population of their country
and, in correspondence with various agreements, other COMECON-countries
with shoes, machines and other useful goods. Whether they delivered »socialist
profit« to national institutions or, on the contrary, merely figured
as a subsidized enterprise, and whether they punctually fulfilled their
planned outcome did not matter too much as far as the maintainance of
production was concerned. If one of these companies for example produced
only 1.8 million rubber boots instead of the planned 2 million a year,
the director might be dismissed. Or a moral campaign would be started,
the workers would "voluntarily" decide to work unpaid overtime.
The planning authority might even provide some money for a new machine
to increase production. However, a company was never closed down if the
output did not correspond to the plan. In this case the lack of boots
next year would have been 2 million instead of only 200.000.
For the socialist gouvernment itself or its national bank it was
no problem at all to provide its economy with crowns: They only
had to be printed, as the crown was no convertible currency anyhow
the state did not need to fear a negative effect on the exchange rate
that might deteriorate the terms of trade and therefore the balance of
trade. Goods were exchanged per barter with the western states, so the
crown as a currency did not figure at all. With the COMECON-states Czechoslovakia
signed forward contracts which used all kinds of indicators for clearing,
but did not care at all for the number of Czechoslovak crowns that had
been emitted and pumped into economy in the current years.
These so characterized enterprises are now confronted with the demand
to produce for another end than the one they served so far and
it turns out that they are no good for that. In other words: A new standard
is applied to them and they cannot meet it. This is the why the highly
esteemed and sought for foreign capital proves to come so slow, and not
only in Czechia and Slovakia. The task a potential investor is facing
is not to modernize existing production units, f. ex. supplying new machinery
or digitalizing offices, but to revise the entire base of production.
In this case the offer that is made to foreign capital is reduced
to a lot of cheap workforce and a certain level of infrastructure which
often does not meet the high demands of a Western European or American
Klaus & Co. are not the only ones to submit this kind of offer to
western capital. And so they, that is the successor states of Czechoslovakia,
are in this respect competing with most of the states in the world, from
Taiwan to Marocco. The original intentions of the Czech and Slovak politicians
were different: Stressing the slogan "Europe" Czechoslovakia
was after a phase of "transformation" supposed
to incorporate itself into the ranks of the western industrialized nations.
The only thing it has achieved so far is a certain selective market economy:
tourism, black market, prostitution; and a mighty production drop in both
industry (3) and agriculture, furthermore a remarkable inflation
as a consequence of the
Liberalization of prices
in January, 1991
According to an OECD-study the inflation hit 50% in 1991.
The official version explaining this phenomenon is that the prices had
been "artificially" kept low, now they would have to be "decontrolled"
and then they would "balance out" as soon as a "balance
of supply and demand" would be established.
This view in no way reflects reality. Also in a functioning capitalist
economy there is no guide-line of supply and demand for the creation of
prices, but the producer charges the consumer with his own costs of production
and a equivalent profit margin. If nobody buys his products at his price,
these products wont leave him and inevitably he will have to file
for bankruptcy. If he reduces the price without modifying his costs of
production at the same time he cannot continue his production for lack
of capital and he will also find himself in Chapter 11. The means for
being successful on the market is to minimize the costs of production
by investment and reorganization, and so to be competitive. This way demand
is created by offering goods at a price that attracts markets that
otherwise would not have been "natural buyers" of such products.
Or, the price is just competitive enough to drive other, similiar products
from the market: In this case the existing demand is taken advantage
In an economy as the Czechoslovak one there is no capital and therefore
this method cannot be applied. If the prices are liberalized this has
the effect that everything becomes more expensive and nothing else.
The various dealers and merchants are constantly looking for bargains,
buying at off-price and overcharging whatever they sell. Truly, this archaic
form of enrichment is being practiced by the shopkeepers over here, too,
but in this case they are the agents of a production that has other methods
for the determination of prices and uses them for the realization of profit.
In Czechia and Slovakia this is different. In this part of the world the
domestic products simply become more expensive according to the location
of the store in the outskirts of Jimramov or in the center of Prague
which has the effect that many people cannot afford or do not want
to buy them any more, and the domestic demand for these products decreases.
The producers, the companies, are in vain trying to find alternative markets
as the western industrialized countries are impeding the import of czechoslovak
products with quotas and high protective duties especially in those
cases where these products would be able to compete with western products
both in quality and price. These protective measures of the western gouvernements
are argued by such phrases as: the cost prices in Czechia and Slovakia
were "unrealistic", the wages too low and the subsidies too
high. (4) (If on the contrary a western enterprise wants to make business
"over there", that is to invest in a Czech or Slovak company
and make profit, then these disadvantages turn into advantages and are
not "unrealistic" at all.)
Another possibility to earn profit with a junkyard and some private initiative
is to import western consumptive goods the differences between
legal import and smuggle are pretty diffuse even to the authorities
and to take what you can get in addition to net price and transport costs.
This is neither the method to stimulate the domestic production nor to
make it more attractive.
The cost of living has as a consequence risen considerably for the Czechoslovak
citizens, compared to this the rising of the wages remains within certain
limits: "In May (of 1991) the Minister of Finance happily proclaimed
that only 15% of the companies had made full use of the 9% margin for
wage rising granted by the gouvernment." (5) (In this period the
inflation rate was more than 50% compared to 1990) In autumn 1992, this
margin for increase in wages was extended to 29%.
As a summary it can be stated that the liberalization of prices has caused
higher sums on wage slips and price labels, has resulted in waning production
and has contributed to the humble wealth of some smugglers and merchants.
No other results can be found. It is considered a success "that the
inflation could be kept under control." (6) (A charming result: I
cannot get rid of the ghosts I called, but I keep them on a leach!)
This phenomenon of "restricted inflation" is explained by the
former president of the Czechoslovak Federal Bank and current president
of the Czech National Bank, Tosovsky: It is caused "by the reduced
domestic purchasing potential". (7) In plain words: People have become
poorer and there are a lot of things they cannot afford any more. This
and nothing else is a brake for the further rise of prices. This kind
of "anti-inflational policy" of impoverishment of the working
masses may serve as an incentive for production and business in a capitalist
economy, because here it makes workforce cheaper and so eases the profitable
production for the investor. In Czechia and Slovakia it effects nothing
but a decrease in the domestic demand that can not be made up for by exports.
For those who name the Slovaks as a scapegoat for the separation of Czechoslovakia:
It is unjust to claim that the main effort for it was made by the Slovak
politicians. It is true that the winner of the elections in Slovakia,
Vladimir Meciar, in his nationalistic delusion that Prague is the source
of all evil rather is prepared to put up with an even quicker breakdown
of his national economy than further on submit to this "dictatorship".
Václav Klaus, on the other hand, is mistaken in his conviction
that with Slovakia he would only get rid of a handicap and now nothing
will stand in the way of the realization of his reforms. The good money
that he doesnt want to waste on unprofitable Slovak companies is
no good money at all but the self-emitted crown that is not accepted on
the world market. The goods that the Czech enterprises have bought from
their Slovak colleagues up to now for these very same crowns are from
now on only to be had against hard currency, either as always from Slovakia
or from other countries. And it is fatal to underestimate the range of
such imports: In more than 40 years of socialist division of labour a
lot of dependencies have been established.
The proposal of Meciar to establish a Czech-Slovak Federation with an
international acknowledged Slovakia but with a common currency,
was consciously or not an attack against Klaus financial
policy, in special against his restrictive monetary policy, and consequently
it has been rejected immediately.
In their efforts to proclaim optimism, the western know-it-alls,
so-called experts, at times deliver almost fantastic statements when commenting
on these political and economical quakes. A German professor acknowledges
the "achievement" that the decrease of production has
gone back to 5%, and that he inflation in this last month has reached
a standstill. This is an interesting statement from the citizen of a country
where the economists have near to hysterical breakdowns, should the economic
growth measure less that half a percent compared to the predicted
one. The guest from the Czech Republic (in this discussion on TV) who
is a member of Klaus party, the ODS, had to protest by explaining
that the Czech authorities in no way esteemed this a success. His effort
was in vain. He was enlightened that it is all a matter of figures and
after all 5% is better than 10%.(8)
A Cologne-based institute for economy believes that the Czechoslovak crown
has promising prospects becoming a convertible currency. How do they argue
this? Because the crown has been subject to a 46% depreciation between
1989 and 1992. Usually this is hardly considered an indication of a currencys
Conclusion: Václav Klaus is executing all
the hardships connected to an economical system called capitalism on his
own people. This is what he is praised for by western analysts,
not for his successes he has not got any. What makes Klaus attractive
to western spectators is the practical application of all the dogmas
of political economy:
He advocates the thesis of "downsizing" the economy: It does
not imply the ruin of an economy but its recovery when only that
is being produced what is needed and sold.(10) The message is clear:
If something is not bought it is therefore not needed. Whoever
does not have the required change cannot allow himself any desires and
needs. The political-economical consequence of this dogma is: rather no
production than a non-profitable one. It implies the resignation of Czechoslovakia
(and nowadays from Czechia, too) as an economical subject.
Klaus pronounces with unmistakable frankness that the welfare of the citizens
is to be measured by and subdued to the prosperity of economy. Wages cannot
be raised as long as productivity has not risen: The entrepreneur may
take his increased costs into account if he wants to reject the workers
demands the opposite case is not permitted.
He is convinced of the fact that man is a "homo oeconomicus"(11) everybody is actually a born profit maker. Whoever does not
develop and keep up this basic feature of his in proper measure therefore
cannot be regarded a full member of mankind.
Apart from the racism that is included in this point of view Klaus
defines what he wants from the people not only as their proper
urge the way the common hypocrite does it, but even as their attribute,
he is thus immunizing himself against all criticism. Now its no
longer the economy any more that demands sacrifices, but its
the people who are deficient, if they do not come up to the requirements
of this economy, if they do not realize profit, or if they lose their
job. Taking a closer look at this, you will find that it is a serious
insult to the public.
Klaus has been successful in the Czechoslovak electoral campaign in picturing
all the consequences of the opening of Czechoslovakia to the world market
as the heritage of communism and in introducing himself as the only person
who can clean up this mess and lead his country back into the ranks of
capitalist industrialized nations. More than 30% of his subjects gave
credit to that and voted for him, thus authorizing him to continue his
policy. They will have to pay the bill themselves.
(1) Salzburger Nachrichten (Austrian daily newspaper), 9.6.1992 (SN)
(2) quoted from an interview with the Czech weekly magazin "Forum"
in February 1990
(3) "Czechoslovakias industry is on the brink of collapse"
the Minister of Industry of the Czech Federal Republic, Jan Vrba, stated
at a press conference in Prague. He substantiated his Cassandra-statement
with the miserable economic indicators of January: The industrial production
decreased by 48,9% compared to January, 1991. The profit of the industrial
enterprises shrank from 12,7 million crowns to 2,9 million
liabilities of these companies towards the Ministry of Industry doubled
in comparison to january, 1991 and reached the sum of 50,1 million crowns..
in: SN 18.3. 1992
According to a survey taken by the Czech weekly magazine "Hospodarské
Noviny" from 17.4. 1992 the decrease of industrial production in
January and February in all of Czechoslovakia was 36,1%, the sale of industrial
products fell back by 40%.
This information I quote only to contradict the widespread opinion that
the Czech Republic is in relatively fine shape and only Slovakia is to
be considered the problem child of the nation.
(4) Representatives of the Austrian industry, in SN, 4.4. 1992
(5) In "Osteuropa-Thema" Nr. 31, edited by the Deutsche Bank
in November of 1991
(6) the chairman of the German "Industrie und Handelskammer"
(chamber of industry and commerce) at the opening of their Praguean branch,
in: HVG (Hungarian weekly magazine), 18.1.1992
(7) in SN, 4.11.1991
(8) in the discussion-program "Club 2" in the Austrian television
on june 23rd, 1992
(9) in SN, 24.4. 1992
(10) from an Interview with Klaus in SN, 5.6.1992
(11) from an interview with Klaus in the German weekly magazine "Spiegel"
This article was originally published in German in the Austrian quarterly
magazine "FORVM" in November, 1992. It has been slightly modified
to adjust to the quick political changes taking place in this part of
the world and to suit an US-audience.
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