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OPINION.
Czechoslovakia: Casino Capitalism or the Real Thing?
When prof. Susan Strange of the London School of Economics was writing her book in
the mid-l980s, she had Western world on her mind. Her "Casino Capitalism" contains an
occasional scathing attack on the "casino" mentality of some of the players. On the address of
marxists she observes that "...only a few of them have perceived that the main weakness of a
modern global capitalist system lies not in the exploitation of labour nor in the oppression of
the 'working class', but in the inability of its leading governments to run a monetary system
stable and viable enough to sustain a global system of production and trade".
Six years after the publication of her influential book a nagging question is on the
minds of a number of economists, bankers, officials and, increasingly, asked by the ordinary
people in the Czech Republic and Slovakia: real capitalism or the casino variety?
To begin with, it is easy to see that a number of formidable obstacles lies in the way of
institutional transformation. A country cannot move to a free-market system overnight simply
by abolishing an existing system and proposing a constitutional and legal structure that limits
all government intervention in economic affairs completely. Western-style capitalist
economies do not emerge automatically and immediately. True transformation requires the
restructuring of knowledge and attitudes as well as restructuring of formal institutions and
setting up a proper institutional framework. Further complications in the transition process
arise in the recognition that the wholesale transformation requires that many, if not most,
crucial elements of the system be subject to alteration simultaneously. The situation is a fluid
one in which the rules of the game have to be continually revised while the game is in
progress.
The Czech government proclaimed commitment to restructuring still seems
unalterable. One of many inevitable consequences on the road from serfdom to democratic
system and free market is downsizing or closures of uncompetitive, inefficient, overmanned
enterprises and sectors. Those are the so-called 'value subtractors'; the producers who
generate negative value-added at world market prices. Exchange rate devaluation and
maintaining a low real wage can provide some time and relief for those who are not 'value
subtractors', but that time should have been wisely used. Has it? The Czechoslovak
government has allowed what appears more than a reasonable period of adjustment.
Automatic bankruptcies immediately after the price liberalization of January 1991 would have
created unnecessary unemployment and be politically dangerous. Nevertheless, rising but
transitory unemployment cannot be ruled out and a social safety net together with retraining
programs and requalification courses have been set up by the three governments (federal and
the two republican ones). In this light, the recent decision by the Czech government to
postpone -by another six months- the bankruptcy law which had been approved by the
Federal Parliament as long ago as July 1991 and was to take effect as of Oct. 1 appears a
"play for time".
Institutional transformation mentioned above is difficult in a country which still sports
an informal "old boys" power network based on interpersonal relations. "Capitalising
communism" is more than a phrase: metamorphosis (to borrow Marx's utterance) of old
apparatchiks into newly-rich "free traders" with the help of leveraged management buyouts
(sometimes with help of foreign capital) has occurred on a disturbingly large scale. "Tippees",
con-artists and unethical -if not outright corrupt- officials in a country lacking meaningful
securities laws barring insider information thrive and proliferate. Nor is this phenomenon
prevalent in the Czech lands only. Most of the other post-communist countries of the region
have similar problems in this regard.
Resisting change is another phenomenon that originated and owes its survival to the
previous long period of central planning. The reasons for the resistance to change are, apart
from inertia, intrinsically related to the incentive structure built into the previous regime of
economic policy framework, both at the operational level of the economy and at the political
level. Under the socialist regime the previous government aimed to regulate the system, which
lacked elementary mechanisms of 'checks and balances'. The question naturally arises: which
of the regulators (i.e., various ministries, central bank, other authorities) was to take on the role
of the "invisible foot" -to borrow one half of Adam Smith's famous allegory in describing his
"laisser-faire" doctrine- necessary to kick out mismanaged and unprofitable enterprises and
incompetent managers? The government authorities shied away from this unpopular role and,
unsurprisingly, managed to shirk. In the extreme, the regulators became natural allies of
regulatees and together they set their respective parameters so as to remain on the "safe
side" of their options, thereby avoiding inflicting harm on the regulated enterprise sector. The
outcome was a massive resorting to measures of exemption from the official, general rules
and to interventions in an opportunistic fashion.
This worn-out socialist central planning model is a relic which might not be replaced
completely and entirely by the incentive structure of the market regime for some time. On
balance, these incentive forces still reward, to some extent, undisciplined operational
behaviour by a certain proportion of enterprises. The strategy to overcome this inertial
behaviour is to develop tools, which act upon the incentive structure by strengthening
horizontal relationships and by weakening long-established informal networks. The role of
comprehensive privatization (in addition to the populist giveaway known as the voucher
method) in combination with other tools is pivotal. In many cases it is appropriate that alliances
with foreign business partners and foreign direct investment should play a major role in this
strategy.
The Czech government is aiming at the "market without adjectives" as any alternative
such as the "third way" or "market socialism", is clearly an untenable proposition which has
failed always and everywhere. However, the Czech government's apparent inability to back its
free-market rhetoric with the statutory regulations and securities laws governing functioning of
the future capital markets is regrettable. The U. S. securities laws & legislation and a
regulatory agency such as the U. S. Securities and Exchange Commission could have served
as useful models but did not. The "spontaneous" dealing and trading in various paper of
unknowable and often dubious value will, indeed, resemble an over-the-counter casino with all
attendant vices such as unscrupulous and unchecked use of inside information, "irregular
trading" and fraud.
Meanwhile, no one pretends that the task the Czech government has undertaken is
easy. There will be more difficulties along the way: the momentous transformation of Czech
economy and institutions entails both costs and benefits as businessmen and investors well
know. As China's ageing leader Deng Xiaoping explained you cannot have the fresh air of
economic reform without letting in a few flies. Looking at a local newspaper advert recently,
the question arises whether letting in flies or jumbo jets. The ad in question offered laundering
dirty money which reads as "washing" in Czech. The word could have been taken at its face
value which means that whoever placed the advertisement could -successfully- claim that
services for washing dirty bank notes were actually being offered. After all, double-speak,
ambiguous and rubbery laws, and kafkaesque theatre have all been perfected under the
Communist rule here. Oh, the reference code for the newspaper advert read: "Honest
dealings!"