Amelie Lanier, The Wild East
November
1992

May 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 year”. [1]
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. [2]
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 of capital.
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” it’s 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 it’s national bank it was no problem at all to provide it’s 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 investor.
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 won’t 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 of.
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 doesn’t 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 currency’s stability. [9]

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 it’s 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 it’s no longer the economy any more that demands sacrifices, but it’s 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.

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.

[1Salzburger Nachrichten (Austrian daily newspaper), 9.6.1992 (SN)

[2quoted from an interview with the Czech weekly magazin “Forum” in February 1990

[3“Czechoslovakia’s 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 … The 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.

[4Representatives of the Austrian industry, in SN, 4.4. 1992

[5In “Osteuropa-Thema” Nr. 31, edited by the Deutsche Bank in November of 1991

[6the 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

[7in SN, 4.11.1991

[8in the discussion-program “Club 2” in the Austrian television on june 23rd, 1992

[9in SN, 24.4. 1992

[10from an Interview with Klaus in SN, 5.6.1992

[11from an interview with Klaus in the German weekly magazine “Spiegel” #17/1991

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