Czech Approach to Transformation Gradualism x Shock Therapy Gradualism x Shock Therapy Accepted...

Czech Approach to Czech Approach to TransformationTransformation

Gradualism x Shock Therapy Gradualism x Shock Therapy Accepted Transformation Accepted Transformation StrategyStrategy

ShockShock TherapyTherapy Voucher (Coupon) Privatization Voucher (Coupon) Privatization

A Specifically Czechoslovak A Specifically Czechoslovak ApproachApproach

Critical RemarksCritical Remarks Theoretical Concepts Linked Theoretical Concepts Linked with Critical remarkswith Critical remarks

Gradualism x Shock TherapyGradualism x Shock Therapy

Gradualism – restructuring Gradualism – restructuring first, thereafter gradual first, thereafter gradual privatization by standard privatization by standard methodsmethods Shock Therapy – mass scale Shock Therapy – mass scale privatization before privatization before restructuring, un-standard restructuring, un-standard privatization methods necessary privatization methods necessary because of the lack of financial because of the lack of financial capitalcapital

Accepted Transformation Accepted Transformation StrategyStrategy

Shock TherapyShock Therapy Prepared by a team organized by Prepared by a team organized by Vaclav Klaus (current President)Vaclav Klaus (current President) Backed by Washington Consensus Backed by Washington Consensus (International Monetary Fund(International Monetary Fund´s´s (IMF) medicine)(IMF) medicine)

Fiscal AusterityFiscal Austerity PrivatizationPrivatization Market LiberalizationMarket Liberalization


Transformation Rules: (Vaclav Transformation Rules: (Vaclav Klaus 1994)Klaus 1994)

Transformation is neither Transformation is neither modernization, nor restructuring, modernization, nor restructuring, nor the financial stabilization of nor the financial stabilization of individual firms, because all these individual firms, because all these are post-transformation tasksare post-transformation tasks


Systemic change is primarily and Systemic change is primarily and mainly about privatizationmainly about privatization. . Systemic change has its Systemic change has its mmacroeconomic, liberalization and acroeconomic, liberalization and deregulation dimensions deregulation dimensions

Privatization during transformation Privatization during transformation is different from privatization in the is different from privatization in the WestWest Mixture of standard and non-Mixture of standard and non-

standard methodsstandard methods A different role of the price of A different role of the price of

privatized firms (and privatization privatized firms (and privatization revenues) and different ways of revenues) and different ways of evaluating privatized firmsevaluating privatized firms


The key task is looking for an The key task is looking for an owner who will perform post-owner who will perform post-privatization restructuring, not privatization restructuring, not for a state bureaucrat who will for a state bureaucrat who will restructure the firm before restructure the firm before privatizationprivatization

Minimizing the period of pre-Minimizing the period of pre-privatization agony, because no privatization agony, because no method exists to rationalize method exists to rationalize behavior of firms waiting for behavior of firms waiting for privatizationprivatization


Macroeconomic, liberalization and Macroeconomic, liberalization and deregulation dimensions deregulation dimensions Basic macroeconomic stabilization has Basic macroeconomic stabilization has

to be carried out before the to be carried out before the liberalization of prices and foreign liberalization of prices and foreign trade (liberalization of internal and trade (liberalization of internal and external markets)external markets)

Liberalization of prices and foreign Liberalization of prices and foreign trade must be carried out at the same trade must be carried out at the same time (otherwise the behavior of time (otherwise the behavior of inherited monopolies and oligopolies inherited monopolies and oligopolies can endanger the whole process)can endanger the whole process)


Liberalization of foreign trade must Liberalization of foreign trade must come after a significant devaluation of come after a significant devaluation of the currency, and it must be the currency, and it must be accompanied by introduction of accompanied by introduction of internal convertibility of the currencyinternal convertibility of the currency

Liberalization and deregulation steps Liberalization and deregulation steps must be as extensive as possible, must be as extensive as possible, economic variables must be free to economic variables must be free to move, except of the exchange rate – it move, except of the exchange rate – it has to become the anchor to which all has to become the anchor to which all other economic variables are tiedother economic variables are tied


The Hypothesis of Two Cushions The Hypothesis of Two Cushions (Klaus 1994)(Klaus 1994) After price liberalization there will After price liberalization there will

be a rapid decline in real wages – be a rapid decline in real wages – decrease of costs for firms. This is decrease of costs for firms. This is the first cushion for firms.the first cushion for firms.

Strong devaluation before foreign Strong devaluation before foreign trade liberalization supports trade liberalization supports exporters. This is the second exporters. This is the second cushion for firms.cushion for firms.

Voucher PrivatizationVoucher Privatization State-owned firms were transformed State-owned firms were transformed

into joint-stock companiesinto joint-stock companies 1664 joint-stock companies and 1664 joint-stock companies and property worth (in accounting value) property worth (in accounting value) almost 350 bill. CZK were totally or almost 350 bill. CZK were totally or

partially privatized in two waves, partially privatized in two waves, from 1991 to 1995from 1991 to 1995

Voucher PrivatizationVoucher Privatization

MechanismMechanism Everybody could buy a voucher (for Everybody could buy a voucher (for

about 1000 CZK), specialized money – about 1000 CZK), specialized money – investment points - just for buying the investment points - just for buying the stocks of privatized companies stocks of privatized companies (nothing else)(nothing else)

Centre for Voucher Agency (CVP, a Centre for Voucher Agency (CVP, a state agency) was the market makerstate agency) was the market maker

11stst wave occurred in 5 rounds, the 2 wave occurred in 5 rounds, the 2ndnd wave in 6 roundswave in 6 rounds


The CVP announced for each round The CVP announced for each round the price of stocks in investment the price of stocks in investment points for all stocks (of each points for all stocks (of each privatized company)privatized company)

Where demand was lower than Where demand was lower than supply, stocks were soldsupply, stocks were sold

Where demand was higher, nothing Where demand was higher, nothing was sold and the CVP increased the was sold and the CVP increased the price in investment points for the next price in investment points for the next roundround

Voucher PrivatizationVoucher Privatization The first wave passed at the The first wave passed at the

federal (Czechoslovak) levelfederal (Czechoslovak) level In 1995, there were 6 million In 1995, there were 6 million

shareholders in the Czech shareholders in the Czech Republic. Voucher privatization Republic. Voucher privatization improved the knowledge of improved the knowledge of citizens about the property citizens about the property relations they were not familiar relations they were not familiar before.before.


It helped to establish a capital It helped to establish a capital market.market.

It enforced the booked It enforced the booked (dematerialized) form of security (dematerialized) form of security and the establishment of the and the establishment of the Securities Centre – a special Securities Centre – a special organization that keeps records organization that keeps records of the mentioned securitiesof the mentioned securities

It assisted with the birth of more It assisted with the birth of more than four hundred investment than four hundred investment funds and unit trusts which in a funds and unit trusts which in a short time became an important short time became an important factor in the capital marketfactor in the capital market


It demonstrated that it was It demonstrated that it was possible to prepare a possible to prepare a demanding technical system demanding technical system with millions of clients during with millions of clients during a few months and operate it a few months and operate it successfullysuccessfully

Critical RemarksCritical Remarks

There is no official evidence about the wild There is no official evidence about the wild forms of privatization: the stripping of state forms of privatization: the stripping of state assets and the tunneling of state assets and the tunneling of state enterprises during the so-called pre-enterprises during the so-called pre-privatization agonyprivatization agony From the official point of view, this From the official point of view, this

activity representactivity representeded nothing more then nothing more then the devaluation of privatized assets and the devaluation of privatized assets and therefore it therefore it waswas the private problem of the private problem of new ownersnew owners

Is the unsustainability of Czech pIs the unsustainability of Czech public ublic finances somehow connected?finances somehow connected?


Week cooperation between laws Week cooperation between laws and economicsand economics The privatization process is a major The privatization process is a major

legal transformation with dramatic legal transformation with dramatic economic consequences, but lawyers economic consequences, but lawyers do not understand economic do not understand economic processes and economists have little processes and economists have little regard for the law (Tomas Jezek, regard for the law (Tomas Jezek, 1997)1997)


Speedy privatization without firm Speedy privatization without firm rules is a threat for emerging rules is a threat for emerging

orderorder Erosion of informal institutionsErosion of informal institutions Trade-off between the speed of Trade-off between the speed of

change and business ethicschange and business ethics Conservation of the rent-seeking Conservation of the rent-seeking

behaviorbehavior

Critical RemarksCritical Remarks What does it mean private? What does it mean private?

Official statement from 1997 Official statement from 1997 (Tomas Jezek)(Tomas Jezek) About 60% of state-owned assets About 60% of state-owned assets

were distributed free of charge were distributed free of charge (about 40% through voucher (about 40% through voucher privatization, about 20% through privatization, about 20% through free transfers to municipalities, free transfers to municipalities, the rest through restitutions)the rest through restitutions)

30% were sold (direct sales and 30% were sold (direct sales and public tenders)public tenders)

10% yet to be sold10% yet to be sold

Critical RemarksCritical Remarks Czech “Banking Socialism” Czech “Banking Socialism”

Banks stayed in the hands of the Banks stayed in the hands of the statestate

They owned investment funds They owned investment funds that owned the privatized firmsthat owned the privatized firms

Quasi-private propertyQuasi-private property and and connected problemsconnected problems Problem of bad creditsProblem of bad credits Enormous increase of business Enormous increase of business

creditscredits BBanks anks were privatized around were privatized around

2000, it solved this quasi-private 2000, it solved this quasi-private property problem, with property problem, with considerable costs. considerable costs.

Theoretical Concepts Linked Theoretical Concepts Linked with with Critical RemarksCritical Remarks

Stiglitz (Nobel Price Winner in Stiglitz (Nobel Price Winner in Economics) criticizes the Economics) criticizes the International Monetary Fund International Monetary Fund (IMF) and the Washington (IMF) and the Washington Consensus from the point of Consensus from the point of view of New Institutional view of New Institutional EconomicsEconomics

Washington consensus neglects Washington consensus neglects the role of transaction coststhe role of transaction costs


Roman Roman Property Property RRightsights ““Usus” => responsibilityUsus” => responsibility ““Usus fructus” => you may take Usus fructus” => you may take

resources for your livingresources for your living ““AAbusus” => you may sell your busus” => you may sell your

propertyproperty

Quickly gained property does Quickly gained property does not create the sense of not create the sense of responsibilityresponsibility

Question of Social JusticeQuestion of Social Justice


Use and abuse of the theorem Use and abuse of the theorem of Ronald Coaseof Ronald Coase ““Theory of lights off”Theory of lights off” Insufficient solutions for the Insufficient solutions for the

enormous asymmetry of enormous asymmetry of information during transformationinformation during transformation

Czech Approach to Transformation Gradualism x Shock Therapy Gradualism x Shock Therapy Accepted...

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