Dr Khalil's Intellectual Space

Pak Political Economy +

Dr Khalil's Intellectual Space

Pak Political Economy +

Privatising successfully – the case of Czech Republic

Note: This article was originally published in The Express Tribune

ISLAMABAD: Altering the economic system is not an easy task. It is more complex when carried out half-heartedly. Privatisation is only a part of this process. It may not succeed if done in an isolated manner. Among other things, it requires a competitive environment to bear fruit.

A case in point is the erstwhile Czechoslovakia. It provides us with a good learning experience to see how after the fall of a collectivist state, the gigantic task of changing the economic system was handled.

Dr Vaclav Klaus was one of the key members of a movement, Velvet Revolution, which overthrew communism in Czechoslovakia. He was the prime minister (1993-1997) and the president (2003-13). An economist and politician, he was the first non-communist finance minister of Czechoslovakia.

According to Klaus, the starting point of a change in Czechoslovakia was liberalisation and deregulation of markets. And this move consisted of three main liberalisations: i) price liberalisation, ii) trade liberalisation, and iii) business liberalisation.

As to the price liberalisation, for 40 years the people in Czechoslovakia had totally frozen and administered prices. So, liberalising prices was a dramatic shock.

He makes a comparison. The Australians spent years or decades discussing liberalising the price of milk in Australia. But in Czechoslovakia they didn’t have just one case of milk. They had hundreds and thousands of prices with possibly the same impact on individuals in different groups of society.

The second move, trade liberalisation, was also a dramatic one. It meant opening the country after 40 years of semi-autocratic and protected economy.

And, the third move was liberalisation of entry into market for all types of enterprises, both private and foreign.

These three liberalisations represented the first stage of transition, and not only changed the whole society but also enormously increased the supply of goods and services.

It brought equilibrium in the market overnight. It interrupted some of the old, deeply built-in behaviour of citizens, and it attacked and endangered various old habits they inherited from the communist past.

Klaus readily admits that realising such changes was socially difficult, politically brave but technically easy because most of the measures required just had to be announced.

Again, citing the case of milk price, he says that to deregulate or liberalise the price of milk, Australians, or for that matter anyone, don’t need sophisticated theories.

It doesn’t need the involvement of university professors or experts on micro- or macroeconomics. It is sufficient to meet at eight o’clock in the evening and announce on TV that tomorrow morning at 8am the price of milk is free to move. That is what they did in Czechoslovakia.

However, he admits, the second stage of transition was not an easy one. It required more positive and constructive activity from the government. Because, it was necessary not only to introduce such passive transformation measures, but also to implement some active measures. It was necessary to build, establish new and/or transform old institutions and organisations.

And, of course, he says, the crucial point in this respect was privatisation. But it was really impossible to wait for the slow emergence of hundreds and thousands of private enterprises – built from nothing – and for the slow disappearance of state-owned enterprises (SOEs), which 11 years ago in former Czechoslovakia represented almost 100% of the whole economy. He emphatically says: So, we had to privatise. It’s an accepted exercise.

Klaus’s narrative of their privatisation is all but immeasurably instructive. He says: We had to privatise, we decided, and it was necessary to privatise the state-owned firms on a massive scale, on a wholesale basis, not just individual firms.

That is something he always had to repeat and to stress because everyone compares privatisation in post-communist countries with privatisation in France, Sweden and the Netherlands.

I am not an expert on it, he says, but I always say that the brave Margaret Thatcher privatised three or four firms a year, whereas we had to privatise three or four firms per hour! Because otherwise it would have taken a century to do that job.

For that reason, we had to use some non-standard methods of privatisation; we had to do experiments and different exercises.

Lesson to be learnt: In Pakistan, neither the government runs the SOEs successfully, nor does privatise them successfully. So, any non-standard methods and experiments of privatisation would after all be good.

It’s better through political consensus. The way a lot of private entities were nationalised simply by an Act of parliament, all the SOEs be also written off and considered privatised in a wholesale manner by another Act of parliament. Or the executive order will do that!

Another lesson: Deregulate and liberalise the sectors the SOEs belong to, and liberalise trade and prices also. These measures would make the existence of SOEs more obsolete.

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