11/19/97

CONTACT: Kathleen O'Toole, News Service (650) 725-1939;
e-mail kathleen.otoole@stanford.edu

Czech prime minister: NATO about ideas, not enemies

Václav Klaus, the prime minister of the Czech Republic, took time out from lobbying Congress on NATO expansion to address Stanford faculty, students and guests on Nov. 13 about the role of economic ideas in Eastern European transition politics. Klaus spoke at a Faculty Club dinner cohosted by the Hoover Institution, the Institute for International Studies and the Center for Research on Economic Development and Policy Reform.

Trained in economics at the University of Prague, Klaus claimed his chosen field was a "more productive instrumentarium than other social sciences" and had helped him survive eight years minus four days as a politician in a country that he said had moved through four transition periods and was entering a fifth that was more typical of free-market economies.

Václav Klaus, right, with John Raisian, director of Hoover Institution.

During a question-and-answer period, Klaus was asked to state his position on NATO expansion. The 56-year-old Czech leader, who had spent most of the week lobbying U.S. senators, who will vote on whether to ratify admission of the Czech Republic to the European defense alliance, said he found them generally supportive. Senators who are not sure how they will vote, he said, seem to be questioning not expansion but the need for NATO at all, now that the Cold War enemy of the Soviet Union has disappeared.

His answer to those Senators, he said, is that "NATO was, is and should be about ideas, not enemies, and there are ideas which we have to defend." After any war, he said, winners dream that their victory has brought about the "end of history, the end of ideology. It would be a tremendous mistake to think in such terms. I'm sure we are all aware of new dangers, new threats to freedom in the world and we have to be prepared to defend it. "

Klaus also answered a question about why Czech Americans were not finding it easier to reclaim property taken from them by communists. He claimed his country had done more than others in Eastern Europe to restore property rights but added, "there is no solution to the unending flow of requests to do something about the past."

The leader of a center-right coalition that managed to narrowly hold control of the government in 1996 elections expressed more uncertainty when speaking about the future. The country could "fall into the blind alley of populism and empty symbolism," he said, rather than continue to support his coalition's emphasis on free markets.

What follows are excerpts from his speech emphasizing the political problems his country has encountered as it tries to cope with the "unfulfilled expectations" of citizens.

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In the first period, immediately after the unexpected collapse of communism in November 1989 . . . the expectations-reality gap either did not exist at all or was in the opposite direction. The suddenly achieved freedom was valued so highly that no clouds on the horizon were seen or envisaged. Everyone assumed ­ and I have to admit that the politicians, for understandable reasons, did not warn sufficiently against it ­ that transformation has almost no costs. Everyone assumed that . . . elimination of all the political, economic and bureaucratic barriers would bring gains which would be bigger than costs connected with dismantling the old system. Such assumptions were over-optimistic because transformation costs were, inevitably, non-zero.

In the second period, the transformation costs became apparent and somebody had to bear them. The rapid adjustment to a standard economic structure was composed of both contraction and expansion, but the contraction was, especially at the beginning, much bigger than the simultaneous expansion of new activities. Between 1989 and 1993, industrial output fell by 33.6 percent, agricultural output by 23.5 percent and GDP by 21.4 percent. . . . As a result, the expectations-reality gap widened, but at that time we succeeded in explaining and defending it. There were, of course, attempts to argue that a more gradual approach would have been less costly, but we were ­ and are ­ convinced that so-called gradualism would have produced new, dangerous distortions. No less important was the fact that the markets, both at home and abroad, were not "gradualistically" waiting for such experiments and that something like a sophisticated gradualism could not have been realized in a complex, pluralistic, democratic, open society. . . . I am convinced that in such a world there is no room for social engineering and that there is no one who has a mandate, knowledge and capacity to do it. I fully agree with [Nobel economist] Milton Friedman that "the error of supposing the behavior of social organisms can be shaped at will is widespread. It is the fundamental error of most so-called reformers. It explains why they so often feel that the fault lies in the man, not the system."

The third period, which in our case stared in 1993, was characterized by relatively rapid GDP growth and by apparent growth of real personal income, especially wages. In the period 1992-1996, the growth of real wages reached 32.3 percent. Because of low unemployment, we enjoyed a relative social peace. The expectations-reality gap lessened and as a result, the ruling coalition succeeded twice in winning the parliamentary elections, which is an achievement unique in the post-communist world. However, the elections in 1996 were very narrow, which was mostly because they took place already at the beginning of the next period.

The fourth period started at the moment when basic transformation measures and dislocations had already been completed. Because of that, more or less standard problems of a free society and market-economy, together with relative carelessness on the side of citizens about the fragility of a free society, began to dominate the societal atmosphere but with the following unpleasant qualifications:

• As an inevitable heritage from the communist era, there remains a huge list of unsatisfied demands. Our fellow citizens want to be "in Europe" already now. Their collectivist organizations ­ trade unions, professional chambers and similar entities ­ are involved in standard rent-seeking and by doing it they push for collectivist solutions to their demands.
• Our health care system, which is partly privatized . . . is running out of money and needs a radical systematic change.
• Government bureaucracy is slower in understanding all the magic and all the fallacies of the market mechanism than its individual participants. . . . Economic agents are able to use or misuse all the deficiencies of the still immature, shallow markets and the government is, necessarily, blamed for that.
• We have opened ourselves to the rest of the world more than the rest of the world has opened to us. That creates difficult problems with our balance of trade and it complicates the life of some of our industries.
• The government and the private sector are squeezed between powerful and very vocal pressure groups which ­ together with the left-wing political opposition ­ succeeded in converting the atmosphere in the country and widening the expectations-reality gap.

Looking into the future, the fifth period will be characterized either by the continuation of existing, more or less consistent transformation policies and the subsequent reversal of the expectations-reality gap, or by a fall into the blind alley of populism and empty symbolism with all their well-known consequences. I hope we will keep moving ahead.

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By Kathleen O'Toole