czechoslovakia: Creeping towards capitalism.

czechoslovakia: Creeping towards capitalism. - The Czechs are embracing the fruits of capitalism slowly; the Slovaks would like the switch to a market economy to be slower. Diane Coyle reports.

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Last Updated: 31 Aug 2010

The Czechs are embracing the fruits of capitalism slowly; the Slovaks would like the switch to a market economy to be slower. Diane Coyle reports.

Window shopping is a popular past time in Prague. Incomes are down and unemployment is up, but Western goods are now freely available on western terms that is, to anybody with money. It is the western economics texts that could prove the best value. One bookshop window display gives pride of place to The Spirit of Capitalism; towards an ethics of wealth creation.

With elections coming up this month, how to create wealth is one of Czechoslovakia's biggest preoccupations. The privatisations currently underway were designed not to raise money but to distribute to as many citizens as possible the fruits of capitalism. Half the population has paid £20 for a book of vouchers that they can use to bid for shares in large state-owned firms.

Many of the novice investors have placed their vouchers in investment funds. The biggest and most controversial is Harvard Capital and Consulting, run by Harvard Business School alumnus Viktor Kkozeny. It has guaranteed a tenfold return to investors after a year, a promise quickly mimicked by its competitors. Critics say that the funds will not be able to pay up if too many investors try to cash in their guarantee.

It is hard to blame the Czechs and Slovaks for buying the promise of sure returns, for they have more to lose from switching to a market economy than other Eastern Europeans. Their standard of living was relatively high. In 1989, unemployment and inflation were zero. Prices have trebled in two years. Unemployment is 5%.

Paradoxically, this is success. Czechoslovakia began the transition with an excellent record of demand management; but it was a disaster at the micro-economic level. Prices rose and job losses are the cost of adjustment as subsidies are axed and no-hope factories closed. The government, under the stern eye of federal finance minister Vaclav Klaus, has limited the pain through sound macro-economic policy. The underlying rate of inflation is low; the crown's exchange rate is stable; the budget is in surplus and the trade deficit is modest.

"We are afraid of the unrestrained reform romanticism of some of our colleagues," Klaus said. Although many of his compatriots regard him as a hard-liner, he has avoided the precipitous path to capitalism favoured by both Hungary and Poland. As the OECD put it in its latest survey of the economy. "Despite the hardship they are suffering as purchasing power falls and unemployment rises, the Czech and Slovak peoples are behaving with a calm and patience that signal their maturity."

The Czechs are calmer than the Slovaks. Slovakia targeted by the Communist regime for development, has more than its fair share of extinct heavy industry, more pollution, twice the unemployment rate of Bohemia and Moravia, and only a fraction of the new foreign investment.

In the elections Slovak nationalists will demand the devolution of economic power from the federal government. The federal president, Vaclav Havel, can't see Slovakia seceding. Klaus can. While nationalism hogs the headlines, economic reform progresses. Economist David Begg, of the UK's Knowhow fund, estimates that much of the country's manufacturing industry is already nearly competitive on world markets

In 1989, almost all sectors went to former Comecon countries. Last year, half went to Western Europe. The transfer of ownership from public to private control should help consolidate Czech competitiveness. Some 12,000 small enterprises have already been auctioned off and the first round of voucher bids for big enterprises has been successfully completed.

Prague is also spouting scaffolding, with decades of neglect to make good. Modern street cars are replacing the old-fashioned trams. New vehicles are appearing. There are smart international hotels and other amenities for the tourist - western visitors can afford to get five times drunker than at home on Czech beers. Luckily Czechoslovakia does not depend on tourism alone for its future prosperity. Before the year the Czech lands - but not Slovakia - were among the richest industrial area in the world. The house of Dior is unlikely to open in Bratislava, but it could do good business in Prague.

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