Transcript | 2. lecture: Beginnings of a post-communist transformation in Czechoslovakia, years 1990 – 1992 (Ivan Mikloš) - University for modern Slovakia

As we mentioned in the previous lecture, the communism as a regime, built on lies and a lack of freedom, fell because it had to fall. Lagging in all possible aspects was gradually more and more visible and the system simply disintegrated from inside. In the late eighties and in the beginning of nineties the communism practically ceased everywhere with the exception of North Korea and Cuba.

Before new, democratically elected governments there was a lot of objectives and problems. The biggest one was how to change a centrally planned, directive economy into a market economy? Nowhere in the world it had not been done before and thus there were no examples and experience, neither good nor bad. A Polish economist aptly described that situation saying: To change the market economy into the centrally planned one is not difficult at all. It is like to change an aquarium into a fish soup. But to do it vice versa, to change the centrally planned economy into the market one, is so difficult like changing the fish soup into the aquarium.

In Czechoslovakia the regime fell in November 1989. At the beginning of December an interim government was established. Their aim was to lead the country to the first independent elections which took place in June 1990. An important fight about the way how a post-communist economic transformation would be made was happening in that interim government. The whole fight was invisible for the public. That battle was struck between an economic vice-chairman of the interim government Valtr Komárek and the federal Minister of Finance Václav Klaus. The dispute was over a way how the transformation would be done. Valtr Komárek was a defender of gradual steps; he championed rather slow and modest progress, a so-called gradual transformation preserving some elements of market socialism (a sort of a third way). On the contrary, Václav Klaus was defender of a fundamental, radical and fast transformation and establishment of a market economy without attributes. He liked saying that the third way is a shortcut to the third world.

This fundamental battle was happening from their inauguration in December 1989 and it culminated at the beginning of April 1990 when Valtr Komárek left the government. In the end Valtr Komárek lost that battle despite the fact it was him who was perceived by the public as a guarantor of an economic transformation. The true cause of Václav Klaus and his friends’ victory was the fact that they were better prepared and unlike Komárek they presented a compact logic and persuasive conception of the change from the centrally planned economy into the market one.

In June 1990 the first free elections took place. In the Czech part of the federation Občanské fórum (Civil Forum) won; in the Slovak one Verejnosť proti násiliu (Public against Violence) won. Together they created leaders of the first non-communist federal Czech and Slovak government.

Václav Klaus continued as the federal Minister of Finance and main architect of the transformation, which he enforced and prepared during the period of the interim government. A radical, so-called big-bang, transformation was launched 1 January 1991. To specify the matter, this concept of the transformation was not Václav Klaus and his friends’ know-how. Very similar transformation, according to the same principles, was launched in Poland a year ago under the direction of Leszek Balcerowicz. It was from the beginning of 1990.

This concept was based on several respected economists’ recommendations such as Jeffrey Sachs and others, who were experienced in stabilization of subverted economies, for example in Latin America.

The transformation concept was based on four basic principles:

1. Liberalization of prices
2. Economical fiscal and monetary policy
3. Internal currency convertibility and liberalization of foreign trade
4. Prompt and extensive privatization

The first three priorities were launched at once, from 1 January 1991; the fourth priority was launched during the year 1991.

Prices were set administratively and, as we mentioned in the previous lecture, the whole economy was in short supply; the overall demand was bigger than the overall offer. It meant prices were artificially kept lower than they would be if they developed following the demand and offer. Often these prices were lower than production costs as we have pointed it using the example of a milk price.

The second problem was that the offer was too low and restricted also for the reason that the foreign trade was not liberalized. The economy, concerning an export, was not powerful, and therefore it had to drastically limit imports, especially from highly-developed market economies. It enlarged shortage; especially a lack of qualitative products and such products that weren’t produced in our country or in communist countries (see the example with bananas and mandarins).

Third basic problem lied in an official, artificially kept rate which was unrealistically strong. The official rate of the Czechoslovak crown to the dollar was 10:1. However, there was no chance to get dollars in this rate. The real rate following the demand and offer, for example at underhand moneychangers or those who got dollars from abroad, was roughly three times weaker – 30 crowns for a dollar. Even this rate was used by the state. If the state allowed somebody to travel to capitalistic countries, the state then gave the person a so-called foreign exchange commitment, on the basis of which the state sold a foreign currency just by this rate. It was called a 300% surcharge, in order not to admit that the official rate did not correspond to an economic reality.

And finally, the fourth problem was a highly-predominating state property, as we also mentioned in the previous lecture.

We may say that the Czechoslovak economy in the end of the eighties and in 1990 as well was in a situation of a deep economic disequilibrium. And the aim of launching the big-bang reform was to solve this situation and establish a macroeconomic equilibrium. Everything was launched on 1 January 1991.

Just before the end of 1990 the rate of the crown was made real, thus the crown was devaluated at the level of 28 crown for a dollar. And then, from the beginning of the new year 1991, prices were released and the foreign trade was released as well.

What happened? First months of 1991 were shocking for people. During three months prices had grown about 60%; some businesses bankrupted but salaries didn’t grow.

Thanks to an economical fiscal policy the growth of prices was gradually stopped (otherwise the hyperinflation would appear) and the macroeconomic equilibrium was established. It secured that an economy and economic subjects started working in normal, non-deformed, or at least fundamentally less deformed conditions as it had been until then.

The twist was successful. Another matter is what people thought about that; what their reactions were and what political and other consequences it had.

I will provide you more details in following lectures.