PRAGUE TAKES ADVANTAGE OF EDGE TO THRIVE UNDER CAPITALIST SYSTEM.

Byline: Peter Passell The New York Times

Worn down by the long, hard road to capitalism, Poland and Hungary have elected Communist leaders - politicians with decent haircuts and tailored suits, but the children of Lenin, nonetheless.

Meanwhile, unemployment in the Czech Republic is running at just 3 percent, its largely privatized economy is widely expected to post a second consecutive year of 5 percent growth in 1996 and the conservative Vaclav Klaus - in the recent words of Margaret Thatcher, ``my other favorite prime minister'' - seems a shoo-in for re-election next week.

How have the Czechs managed it? Good luck figures in the formula, but so does political pragmatism, fiscal rectitude and ideological determination. ``Klaus is a magician,'' says Jan Krzysztof Bielecki, the reform-minded former prime minister of Poland who is a director of the European Bank for Reconstruction and Development.

Start with luck. Before the collapse of the Soviet Union, Poland and Hungary experimented in central planning with a heart, which left them with reform Communists waiting in the wings to attempt a ``third way'' between capitalism and Communism when the free marketers stumbled.

Czechoslovakia, by contrast, purged its reformers in 1968, leaving only neo-Stalinists to carry the hammer and sickle into the 1990s.

Consider, too, the Czech Republic's assets. Its capital, the only intact antique city in Central Europe, is just a day's drive away for millions of German and Austrian tourists.

The work force is probably the most skilled in the former East Bloc - no surprise, really, considering that Czech Bohemia was the industrial heart of the Austro-Hungarian empire and had a living standard equal to that of France in the 1920s and 1930s.

What's more, the Czech Republic can boast of Camelot-like traditions never extinguished by Hitler or Stalin. ``They have this historical knowledge of success, political and economic,'' said Jeffrey Sachs, director of the Harvard Institute for International Development.

But the little country's biggest economic asset is what it no longer must carry as a liability: Slovakia. While most countries reflexively resist separatists - think of Chechnya - the Czechs left the door wide open for Slovak nationalists in 1992.

When Slovakia departed on peaceful terms in 1993, so did most of the obsolete Czechoslovak weapons industry and most of the nation's unemployed, not to mention Slovakia's constitutional authority to slow free-market reforms.

All this gave the Czechs an inherent edge in the transition, but it is hard to deny that Klaus made the most of it. A combination of conservative monetary policy and tight controls on the budget quickly brought the inflation rate below 10 percent, even as the prices for most goods were decontrolled.

The early decision to peg the Czech currency at an exchange rate that made Czech goods very competitive in the West allowed exporters to make up for the loss of the East Bloc market in just a few years.

But surely Klaus' biggest coup was large- scale privatization using vouchers. After a hiatus to restore properties confiscated by the Nazis and the Communists, to auction off thousands of small businesses and to search for cash buyers for large state enterprises, most of the state's remaining assets were rapidly parceled out to the public.