The Dispute Over Transformation Strategy Zdislav Šulc

Although after November 1989 the absolute majority of Czech society had no doubts about the need to transform the centrally planned economy into a market-oriented one as rapidly as possible, notions about the way this should be done were very vague. Already during the first few months of 1990, however, attempts were being made to formulate and outline the necessary transformations. They show that the views of economists, as well as various political forces, differed in several respects. This was also reflected in the two main transformation scenarios, one produced by the Czech Government’s team of experts, the other by the Federal Government’s team. The final blueprint resulting from a dialogue between these two scenarios was approved by the Federal Parliament in September 1990. On its basis the transformation process began to develop from January 1, 1991, onward.

The Czech and federal scenarios did not differ in terms of their idea of the “final objective.” There were no doubts about the fact that the transformation process had to result in the creation of a consistent market mechanism, which would include a competitive goods and services market based on liberalized prices and effective demand and supply—fully coupled to world markets—together with a capital market and a liberalized labor market, where prices (wages) would be set on the basis of the collective negotiation mechanism between employers and employees. One operation considered to be of key importance was the transformation of the ownership structure of a decisive portion of the state-owned and semi state-owned (cooperative) enterprise sector. The need to make a clean break with central planning and replace it with economic policy implemented using market-conforming instruments on the basis of generally defined “rules of the game” was considered self-evident.

The dispute, however, was about the way that this objective would be reached. Discussions concerning the strategy of transformation focused on two sets of issues in particular: the means of transforming property relations, and the rate and method of opening the Czechoslovak economy to the world [ … ]

The original goal of completing a common scenario prior to the summer 1990 general election was not achieved. The Federal Parliament did not debate the final draft of the economic reform scenario until September, yet even at that time the experts concerned had still not reached agreement on the two issues mentioned. This was reflected by five different critical appraisals of the Federal scenario, elaborated by three research institutes at the University of Economics, and the Economic Forum. With respect to both disputed issues, the scrutinized Federal scenario had opted for the “more radical” alternative. With regard to ownership transformation it opted for the so-called coupon privatization, even though on a more limited scale than originally intended (with the exception of the so-called small privatization which, in line with the opinion of critics, was to be realized through the direct-payment method at public auctions and was to be treated on the same legislative level as “standard” methods, such as the establishment of joint-stock companies with foreign capital participation, employee shares, and similar mechanisms, which were the mechanisms preferred in particular by the expert team of the Czech government, as well as by other participants in the debate). In the second case, they opted for a penetrative “shock” approach consisting of the liberalization of internal prices concurrently with the liberalization of exchange rates and foreign trade, which opponents recommended dividing into two steps (liberalization of internal prices while maintaining two currency exchange markets —a regulated one and a free one—with progressive expansion of the space for the free market in the first step and the introduction of full convertibility in the second step). This was to create space for enterprises and the populace to be able to adapt to the radical transformation of social conditions during the transition to a market economy.

Primarily, the federal scenario of economic reform1 outlined the macroeconomic framework of economic policy for the remainder of 1990 and 1991. It defined it as a restrictive monetary and fiscal policy (zero monetary growth and a state budget in slight surplus). Changes in property relations were drawn up in three segments: small-scale privatization, partial restitution, and major privatization. Following prior the denationalization and discharge of debts via the National Property Fund, major privatization was to be carried out using both standard and nonstandard methods (investment coupons). From January 1, 1991, on the liberalization of internal prices was expected concurrently with the introduction of the so-called internal convertibility of currency (this included the mandatory sale of hard currency to banks and the possibility of unrestricted purchase of hard currency for payments abroad, a single exchange rate based on supply and demand, the exclusion of foreign currency from circulation in the Czechoslovak economy), requiring the devaluation of the Czech crown by more than 80% compared to the start of 1990. The federal scenario only formulated general principles of transformation strategy, however. They were then made more concrete (on several occasions with a controversial interpretation of these principles) via a series of acts of parliament and other legislative steps.

In addition, the scenario dealt with some of the social aspects of economic reform, in particular outlining measures to provide compensation for some of its effects on socially weak strata of the populace (pensioners, families with children), create a social safety net (unemployment, requalification etc.) and tackle issues related to the revitalization of the labor market (collective bargaining on wages and work conditions, the right to strike etc.).

Goals and methods were also outlined for implementing structural policies supporting essential structural changes, particularly with the use of indirect instruments. Special attention was focused on the specifics of the agricultural-food complex (denationalization and privatization, price liberalization, policy on subsidies, the tax system, and external relations).

Note

1 / Hospodářské noviny, September 4, 1990.

Source

Zdislav Šulc, “Spor o strategii transformace,” Transformace české společnosti 1989−1995, ed. Vlasta Šafaříková et al., Doplňek, Brno 1996, p. 119–121.