The Czech miracle: why privatization went right in the Czech Republic.
There are, at bottom, just two ways to bring economic rationality to a state which has seen none of it. One is to carefully analyze the situation, to call high-level conferences and consult with international experts, to measure each tentative step, to be cautious of doing the wrong thing - of going too far, of giving away too much. The other path is to decide that speed is the very essence of reform and that the great catastrophe lies not in doing the wrong thing but in doing nothing.
Most of Eastern Europe Eastern Europe
The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991. has chosen the cautious route. Alone among the former satellites of the Soviet Union, the Czech Republic Czech Republic, Czech Česká Republika (2005 est. pop. 10,241,000), republic, 29,677 sq mi (78,864 sq km), central Europe. It is bordered by Slovakia on the east, Austria on the south, Germany on the west, and Poland on the north. has elected to go fast. Now as Hungary, Poland, and Russia struggle to emerge from the abyss of the planned economy planned economy n → economía planificada
planned economy n → économie planifiée
planned economy n → , as Romania and Bulgaria and Ukraine bobble bob·ble
v. bob·bled, bob·bling, bob·bles
To bob up and down.
To lose one's grip on (a ball, for example) momentarily.
A mistake or blunder. in a post-socialist/pre-capitalist never-never land nev·er-nev·er land
An imaginary and wonderful place; a fantasy land.
[After Never-Never Land, fictional setting used in the play Peter Pan by J.M. Barrie. , a thriving marketplace is flashing its sparkle in the Czech Republic, a modern experiment in radical capitalist transformation.
The Czech model was not how the Western experts had charted the East European reform era. Some did support macroeconomic mac·ro·ec·o·nom·ics
n. (used with a sing. verb)
The study of the overall aspects and workings of a national economy, such as income, output, and the interrelationship among diverse economic sectors. "shock therapy," which has had notable successes in fleeing prices and privatizing small enterprises, but the idea of turning state socialism 1. A form of socialism, esp. advocated in Germany, which, while retaining the right of private property and the institution of the family and other features of the present form of the state, would intervene by various measures intended to give or maintain equality of opportunity, into private enterprise in an instant - that they considered impossible. If the United Kingdom, with its commercial law, its investment bankers, its management consultants, its brokerage houses, and its stock exchanges took all of the 1980s to privatize pri·va·tize
tr.v. pri·va·tized, pri·va·tiz·ing, pri·va·tiz·es
To change (an industry or business, for example) from governmental or public ownership or control to private enterprise: "The strike ... 50 or 60 state-owned firms during the regime of the Iron Lady, then surely the task of privatizing the Czech Republic's 2,700 state-owned firms could not be done overnight.
In 1990, Czechoslovakia was the most socialized so·cial·ize
v. so·cial·ized, so·cial·iz·ing, so·cial·iz·es
1. To place under government or group ownership or control.
2. To make fit for companionship with others; make sociable. of any economy in the Warsaw Pact Warsaw Pact
or Warsaw Treaty Organization
Military alliance of the Soviet Union, Albania (until 1968), Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Romania, formed in 1955 in response to West Germany's entry into NATO. : 97 percent of productive assets were owned by the government. Hungary and Poland, at about 80 percent state owned, were teeming teem 1
v. teemed, teem·ing, teems
1. To be full of things; abound or swarm: A drop of water teems with microorganisms.
2. meccas of laissez faire Laissez Faire
An economic theory from the 18th century that is strongly opposed to any government intervention in business affairs. Sometimes referred to as "Let it be economics. by comparison. By March 1995, however, the assets of the Czech Republic, the two-thirds of Czechoslovakia which split from the Slovak Republic on January 1, 1993, were 80 percent owned by private persons or corporations - easily the highest ratio of any ex-communist European country. Poland, the test ground for early reforms including "shock therapy," is still unhappily stuck at 55 percent private, the same level as Hungary, a country with a 25-year head start on reform.
And the Czechs are not just privatizing like mad, they are "growing the economy." Czech living standards living standards npl → nivel msg de vida
living standards living npl → niveau m de vie
living standards living npl are increasing rapidly. Inflation - which had its pop when pent-up Crowns were unleashed in the early 1990s - is now under 8 percent a year; indeed, the currency has held its ground against the U.S. dollar since 1991. Exports are booming and the federal budget is in surplus. Unemployment is at 3.5 percent, a remarkable feat considering that layoffs from newly privatized firms are virtually ubiquitous. The expanding service sector is swallowing up thousands of "workers" from the "industrial" sector (such employees did not in fact engage in much productive work, nor did their factories demonstrate more than a semantic allegiance to industry). As Prime Minister Vaclav Klaus announced last summer, "We are the first Eastern bloc During the Cold War, the term Eastern Bloc (or Soviet Bloc) was used to refer to the Soviet Union and its allies in Central and Eastern Europe (Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, and—until the early 1960s—Albania). nation to emerge from major surgery and make it into the post-op recovery room."
Most phenomenal, however, is the electoral payoff of what the government still resists calling the "Czech Miracle." While reformers all across the formerly communist nation-states are in hurried retreat, as former apparatchiks turned populists steam back into power, the classical-liberal government headed by Prime Minister Klaus enjoys no serious political challenge from left or right. Prague is in full bloom full bloom
the stage of a crop when two-thirds of the plants are in flower; the crop is mature. and the Czechs are far too busy tending garden to launch the dirigiste dir`i`giste´
a. 1. Directed by a central authority; as, a dirigiste economy s>; with respect to economics, opposed to free-market nt>. See also dirigisme. backlash which swirls violently just beyond.
The Czech reforms were uniquely radical in transferring property from state ownership to private hands, and the society has responded with a flowering of initiative and entrepreneurship. And something more: civility. Politicians in the Czech Republic do not triumph by denouncing foreigners and Jews; the disagreements and arguments of this democratic land have not produced gridlock Gridlock
A government, business or institution's inability to function at a normal level due either to complex or conflicting procedures within the administrative framework or to impending change in the business. ; frustration and hate do not cloud the cobbled cob·ble 1
1. A cobblestone.
2. Geology A rock fragment between 64 and 256 millimeters in diameter, especially one that has been naturally rounded.
3. cobbles See cob coal.
tr. byways of beautiful and historic Prague. And 56 percent (to 12 percent pessimists) of Czech citizens feel "generally optimistic op·ti·mist
1. One who usually expects a favorable outcome.
2. A believer in philosophical optimism.
op " about their future.
Soon after the communist government in Prague collapsed in the "Velvet Revolution The "Velvet Revolution" (Czech: sametová revoluce, Slovak: nežná revolúcia) (November 16 – December 29 1989) refers to a non-violent revolution in Czechoslovakia that saw the " of November 1989, a government was formed by the new prime minister, Vaclav Havel Noun 1. Vaclav Havel - Czech dramatist and statesman whose plays opposed totalitarianism and who served as president of Czechoslovakia from 1989 to 1992 and president of the Czech Republic since 1993 (born in 1936)
Havel . One of the greatest of the dissident writers in Czechoslovakia, Havel earned his anti-communist stripes by doing hard time in a socialist reformatory. He commanded a powerful moral authority. Havel's economic ideas were, however, somewhat poetic; his principled opposition to the hardness of communism had made him squeamish squea·mish
a. Easily nauseated or sickened.
2. Easily shocked or disgusted.
3. Excessively fastidious or scrupulous. vis a vis the harsh realities of a market economy.
Ironically, Vaclav Klaus, an economist who had not participated in the dissident movement, was inherited by Havel as finance minister, having been appointed by a gasping "reformist" communist government in 1989. By June 1990, Klaus had split from the Civic Forum, Havel's party, to form his own Civic Democratic Party, a party preaching a faster, more radical transition to capitalism. After the election of June 1992, Klaus replaced Havel, who was moved to the largely ceremonial position of president. Consistently, Czechs say that Havel, while a national hero, is simply "too soft" to make the hard decisions. Klaus is not.
Klaus's tough love won the policy debates early on, a fact Klaus credits to the one favor which Soviet domination had granted. When Russian tanks rolled through Wencelas Square, crushing the Prague Spring Prague Spring: see Prague and Czechoslovakia.
(1968) Brief period of liberalization in Czechoslovakia under Alexander Dubcek. of 1968, they discredited the notion of "reform socialism" forever. When someone suggested a "third way" - neither capitalist nor communist - Klaus says the answer was smart and final: We tried that. When economic policies end up flattened with tank-track marks on their topside, you tend to remember the botch.
Annual Systemic Changes in Eastern Europe: 1993
Percent Change in Gross Inflation Domestic Unemployment Product
Poland 37.6 4.0 15.7 Czech Republic 18.2 0.0 3.5 Slovak Republic 25.0 -4.7 14.4 Hungary 21.1 -1.5 12.2 Slovenia 22.9 0.0 15.0 Bulgaria 64.0 -4.0 16.4 Romania 296.0 1.0 10.2 Estonia 35.7 -6.0 2.6 Latvia 34.9 -19.9 5.8 Lithuania 189.0 -16.0 2.0 Russia 847.0 -12.0 n.a. Ukraine 8940.0 -15.0 n.a.
Source: Official forecasts adjusted by the Stockholm Institute of East European Economics. Numbers are preliminary. As presented in Anders Aslund: "Lessons of the First Four Years of Systemic Change in Eastern Europe," Journal of Comparative Economics, 19, 22-38 (1994), Tables 1-3.
So the path was clear for quick action. Even before he became prime minister, Klaus and reform-minded liberals had enacted a commercial code (partly borrowed from Germany but tailored to domestic institutions), a restitution process, and a privatization privatization: see nationalization.
Transfer of government services or assets to the private sector. State-owned assets may be sold to private owners, or statutory restrictions on competition between privately and publicly owned law. The code set up a legal system so that contracts and property rights, the necessary legal pre-conditions of a market economy, could flourish. While establishing the most far-reaching restitution program in the Eastern bloc, the law set lightning-fast deadlines - those who wanted to file claims to "reprivatize" property expropriated ex·pro·pri·ate
tr.v. ex·pro·pri·at·ed, ex·pro·pri·at·ing, ex·pro·pri·ates
1. To deprive of possession: expropriated the property owners who lived in the path of the new highway. by the communists after 1948 had less than a year, until September Until September is a 1984 romantic drama set in France. It stars Karen Allen as an American tourist in Paris who falls in love with a married Frenchman (Thierry Lhermitte). External links 30, 1991. The government did not want properties in limbo for years of wrangling over historic ownership rights. The initial privatization policy was intended for small-scale enterprises - restaurants, retail stores, printing shops, gas stations - to be sold by local governments. Since they were small potatoes small potatoes
1. A person or thing regarded as unimportant.
2. An insignificant amount or sum. , the move was relatively easy and uncontroversial: New owners would run things more efficiently, and it was not complicated to figure out who owned what when just a dab of physical assets were involved.
Restitution claims were opened up in November 1990 and moved about $4 billion in assets immediately into private hands. In all, some 100,000 physical properties, including farms, houses, and small businesses, were quickly restituted. Small-scale privatization auctions began January 26, 1991, and were essentially completed by the end of that year, when over 20,000 properties had been sold (25,584 by the end of 1993). The results were encouraging: Workers or others knowledgeable about a business were typically high bidders, and entrepreneurial talents were immediately unleashed. Managers who had adroitly a·droit
1. Dexterous; deft.
2. Skillful and adept under pressing conditions. See Synonyms at dexterous.
[French, from à droit : à, to (from Latin pilfered state assets were turned into profit-minded capitalists in the stroke of a winning bid. Resources became efficiently utilized, and consumers gained a new importance.
The change was visible to the naked eye. As a visitor to Prague in July 1990, I was pained over the gaping hole in the consumer-service infrastructure. Restaurants were rarely open to tourists, even when personnel were on duty and tables empty, and shopping opportunities for convenience items were absolutely nil. The food was abominable; each meal seemed a weird experiment in nutritional efficiency (don't even ask about the communist-bloc yogurt). Just over a year later, in September 1991, I returned to a city bursting with bars and restaurants which catered to the tourist. The food was good - and cheap. By September 1992 - the food increasingly delicious - I was complaining about rising prices and the annoying influx of Western fun seekers. Today the secret is out, and the streets of Prague are clogged with consumer demand.
Small-scale privatization was, however, only the beginning. The core of the Czech reform program, and what has driven its successes full throttle Full Throttle can refer to:
in full National Association of Securities Dealers Automated Quotations
U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on . From Hayek's work, they learned subtle lessons about information, property rights, and institutional transformation no other former communist country has taken to heart.
East European Optimism: 1994
Percent Country Optimistic Uncertain Pessimistic
Czech Republic 56 32 12 Hungary 44 39 17 Poland 36 42 22
Source: International Herald Tribune.
Reform elsewhere has had a hierarchy: 1) establish macroeconomic stability (bring inflation under control and stabilize the exchange rate); 2) create, or patch up, commercial law; 3) deregulate deregulate
To reduce or eliminate control. One of the major forces in the financial markets in the 1970s and 1980s was the federal government's decision to deregulate interest rates. prices; 4) liberalize lib·er·al·ize
v. lib·er·al·ized, lib·er·al·iz·ing, lib·er·al·iz·es
To make liberal or more liberal: "Our standards of private conduct have been greatly liberalized . . . markets by allowing new entry including imports; 5) privatize small-scale enterprises; 6) privatize large-scale enterprises. Country after country has worked from the same list; time after time they have stalled out before getting to step 6.
The Czech market reformers' list is just as comprehensive but prioritized differently. They have always seen the central reform, on which all other success hinges, as getting the vast bulk of capital out of the state's hands. The other reforms are merely a prelude to the central symphony of capitalism: private ownership of the means of production Means Of Production is a compilation of Aim's early 12" and EP releases, recorded between 1995 and 1998. Track listing
1. The belief in or the policy of advancing toward a goal by gradual, often slow stages.
2. Biology at two fundamental levels. Economically, only privatization of the great majority of productive assets could lead to the ultimate payoff - massive industrial restructuring. And politically, only the presentation of an aggressive, radical plan - a plan with a capitalist vision - could defeat the overwhelming reactionary forces of stasis stasis /sta·sis/ (sta´sis)
1. a stoppage or diminution of flow, as of blood or other body fluid.
2. a state of equilibrium among opposing forces. and ugliness.
The Czech reformers believed that the approach preferred by Havel and most of the post-communist regimes in Eastern Europe was wrong in its economics - it eschewed radicalism in favor of perestroika perestroika (pər`ĕstroy`kə), Soviet economic and social policy of the late 1980s. Perestroika [restructuring] was the term attached to the attempts (1985–91) by Mikhail Gorbachev to transform the stagnant, inefficient command - and in its politics - it offered paeans to democratic process but denounced strong political parties or platforms. This soft-pedaling of reform coupled with the romantic belief that democracy would, by itself, solve the problems of post-communist society, was absurd to the strident market liberals led by Klaus. They became democratic Bolsheviks, committed to creating a strong platform and a clear vision of bold, decisive public action. They saw the power vacuum A power vacuum is an expression for a political situation that can occur when a government has no identifiable central authority. The metaphor implies that, like a physical vacuum, other forces will tend to "rush in" to fill the vacuum as soon as it is created, perhaps in the form created by the collapse of communism and argued that if a dynamic liberal agenda did not quickly fill it, reactionary sloganeering slo·gan·eer
A person who invents or uses slogans.
intr.v. slo·gan·eered, slo·gan·eer·ing, slo·gan·eers
To invent or use slogans.
Noun 1. soon would.
The radical capitalist reforms in the Czech Republic reflect the belief that the key to success is a shift in the property-rights structure of society. As Klaus noted in a November 1993 speech at the Czech Economy Society in Prague: "The key task is looking for Looking for
In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. an owner who will perform post-privatization restructuring, not for a state bureaucrat who will restructure the firm before privatization."
The Czechs augured that without a radical shift to private property, reforms would be fruitless. How could one "reform" a vast auto plant if it were still owned by the state? Or bring balance to government expenditures if subsidies to bankrupt government companies continued? Or end subsidies if state ownership continued? Or restrain wages if the government employed most of the work force - a work force that now voted in non-rigged elections? Klaus saw quick privatization of state assets not as a luxury, but as the essence of reform. It would, he said, "minimize the period of pre-privatization agony, because no method exists to rationalise the behavior of firms waiting for privatization (without reintroducing central planning)." The parenthetical is hardly a throw away: It is the approach, to one degree or another, of rising political parties in every other country of the Eastern bloc.
Not only did reform without private property, and lots of it, make little economic sense, the Czech liberals believed that the only way to keep the reform flame on (messaging, jargon) flame on - To begin or continue to flame. The punning reference to Marvel Comics's Human Torch is no longer widely recognised.
The phrase "flame on" may actually precede the flame, in which case "flame off" will follow it.
See rave, burble. high was to overwhelm the public with so much opportunity that Czechs would not have time to quarrel over details. Dumping massive amounts of state property into private hands would not only achieve efficiency - production goes up as socialism goes down - but create a feeding frenzy feed·ing frenzy
1. A period of intense or excited feeding, as by sharks.
2. Excited activity by a group, especially around a focal point: on the corpse of the socialist state The term socialist state (or socialist republic, or workers' state) can carry one of several different (but related) meanings:
An investor who decides not to invest due to market uncertainty.
on the sidelines
Of or relating to investors who, having assessed the market, have decided to avoid committing their funds. of history. Entrepreneurs overwhelmed the political fixers, and the Czech Miracle was born.
Structurally, there are two key elements to the Czech economic reforms. The first is the logic of the "mass privatization." This was an idea hatched by Dusan Triska, who had seen the plan suggested in a Polish policy paper in 1989 and knew about a giveaway of the government's power company to citizens in British Columbia British Columbia, province (2001 pop. 3,907,738), 366,255 sq mi (948,600 sq km), including 6,976 sq mi (18,068 sq km) of water surface, W Canada. Geography
in the 1970s. Adult citizens would bid for companies with voucher coupons, with each entitled to buy one booklet of 1,000 "points" for a nominal sum. The idea was appealing because simply transferring assets to private citizens is equitable and democratic. It also had a very practical aspect to recommend it: Assets could be privatized with minimal payment. That's a fairly important feature when you are dealing with 15 million near-penniless survivors of communism. So on philosophical grounds - "you deserve a break today" - as well as pragmatic ones - "no cash? no problem!" - turning over state enterprises to the citizens, one man, one share, seemed the right thing to do.
But a second structural aspect has been equally important. It is the creation of succeeding "waves" of large-scale privatization, a formalized for·mal·ize
tr.v. for·mal·ized, for·mal·iz·ing, for·mal·iz·es
1. To give a definite form or shape to.
a. To make formal.
b. sequencing of abrupt deadlines by which project proposals have to be submitted to the Privatization Ministry. This seemingly bureaucratic bu·reau·crat
1. An official of a bureaucracy.
2. An official who is rigidly devoted to the details of administrative procedure.
bu constraint - calling for private firms or individuals to create great mountains of paperwork for government to administer - was an economic brainstorm. What it did was motivate a massive unveiling of the information as to what, exactly, constituted the Czech capital base. Not only what land, equipment, inventories, and productive capacity already existed, but what could - if reasonably deployed - exist in the future.
The information that the Czechs needed to privatize 3,000 large state enterprises was vast. The central authorities had little actual knowledge of the stock of social capital; the communists may have laid claim to most everything, but they were terribly sloppy bookkeepers. Just finding out what state enterprises consisted of - their physical equipment and inventories, their land and bank accounts, their liabilities, their accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying - was a mess. The national financials, in other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , made Bill Clinton's foreign policy look orderly.
Just one complicating factor, for instance, were loans from one firm to another. Since the state never let any company go bankrupt, managers had incentives to borrow to the max. Who would lend? Other firms, of course - who could register paper assets (interest-earning bonds) while going to still another firm for needed working capital. If push came to shove, the government would rush in and offer subsidies to mitigate financial losses. It was a financial shell game, and, because firms never suffered for defaulting or being defaulted upon, no one entity really knew which loans were operative at any one time.
Against this lack of information, the secret weapon in the Czech Republic's remarkable transformation is what Klaus adviser Triska calls "the highly flexible concept of a privatization project." Instead of bureaucrats going over the books and deciding what state assets to unload and how, the process is bottom-up. The public petitions the government to privatize a particular property. In effect, private citizens compete to present the best "privatization project" to the state. The advantage is obvious, according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the deputy secretary of the Privatization Ministry, Roman Ceska, who told me in September 1993: "We suffered from the Hayekian information problem."
This is the classic situation in any modern economy. As brilliantly posited by the late Austrian cum English economist F. A. Hayek, the problem is that (even in the best of circumstances) the essential bits of data upon which economies actually run are dispersed throughout society. The pertinent facts concerning demand and supply are known only to individual people who will only reveal such information when it is in their interest to do so. This is not the sort of governmental problem that can be fixed by further research. The data are nowhere available. Information about how, exactly, to achieve efficiencies are hidden deep within the recesses of the human imagination, only to be unlocked by the magnetic force of self-interest.
The Czech reforms have been explicitly designed to tap into this informational gold mine. Rather than dictating the terms of large-scale privatization in a world of darkness The World of Darkness (or WoD) is the name given to three related but distinct fictional universes. The first was conceived by Mark Rein-Hagen, while the second was designed by several people at White Wolf Gaming Studio, which Rein-Hagen helped to found. , the government has accepted proposals from private persons (not restricted to citizens - everyone, even foreign corporations, could play). The rules of the game were established by the privatization authorities and the deadlines were brutally short. But the projects were all designed by the private sector.
An example is provided by the privatization of the Hotel Pariz. A beautiful old inn built in 1903-07 and standing less than one mile from Wencelas Square in Prague, the building spans six stories and features 100 rooms, one cafe, one restaurant, and two banquet rooms. It has a secretarial center and will soon house a health club.
Antonin Brandejs is the general manager (and part owner (Law) one of several owners or tenants in common. See
See also: Part ). A Czech in his early 50s, Brandejs left his country during the political turmoil of 1968, living as a global nomad nomad (nō`măd'), one of a group of people without fixed habitation, especially pastoralists. (Some authorities prefer the terms "nonsedentary" or "migratory" rather than "nomadic" to describe mobile hunter-gatherers. in Germany, France, Canada, and the Middle East. With the collapse of communism, he returned and sought to reclaim the business his family had owned since his grandfather purchased the hotel in 1923. It had been expropriated by the communists in 1948.
The struggle for the Pariz began in January 1991 when, under the newly enacted restitution law, Brandejs's family began the process of making a claim. They were entitled to the physical property minus the value of any improvements. But how you measure the value of such improvements is just the pesky sort of complication that has hammered every restitution program in Eastern Europe. An enormous amount of money had been spent in recent years on renovating the hotel, but much of the money was either wasted (for instance, some rooms in the luxury hotel were left without bathrooms and had to be re-renovated) or pilfered (through insider dealing, with suppliers giving kickbacks to hotel management).
In a capitalist economy such historical accounting numbers are irrelevant in private transactions: Why do I, a buyer, care if you poured money down a rathole Noun 1. rathole - a hole (as in the wall of a building) made by rats
hole - an opening into or through something
2. rathole - a small dirty uncomfortable room ? - I won't pay you a penny more for it. But when the state is restituting only part of an asset, the division of spoils requires some estimate of how much the government's part is worth. Not only did the process use book values to represent the portion they would not restitute res·ti·tute
v. res·ti·tut·ed, res·ti·tut·ing, res·ti·tutes
1. To bring back to a former condition; restore.
2. To refund.
To undergo restitution. , state managers strategically drove up book values with crazy expenditures (made with state funds) in the last days of socialism. This in a deliberate attempt, says Brandejs, to make it more difficult for people such as him to regain lost assets.
Brandejs finally gave up on restitution. It would take years, he felt, to assert his claim - and there emerged a much faster way to do just that: He submitted a privatization proposal to the Ministry of Privatization in January 1992. It wasn't easy. The state managers who controlled the hotel played all kinds of games with the books; no one could make heads nor tails of the operating numbers. Why the subterfuge sub·ter·fuge
A deceptive stratagem or device: "the paltry subterfuge of an anonymous signature" Robert Smith Surtees. ? The hotel's managers themselves had submitted two privatization proposals, one "basic," another "competing." (The second bid brought in an Asian partner to finance still more renovations and offered to pay off Brandejs's restitution claim to the tune of $250,000.) Brandejs's proposal emphasized his restitution rights but also put up cash - nearly $3.5 million to the state. In addition, his company offered to assume all hotel debts.
The competitive process was grueling and lawyer intensive. Brandejs spent precious dollars preparing his bid, presenting his case at hearings before both the Ministry of Privatization and the Ministry of Trade. The managers withheld information as fiercely as Brandejs sought it; both parties politicked heavily. In the end, however, Brandejs won, getting approvals from both ministries and the national government, a three-stage obstacle course obstacle course
1. A training course filled with obstacles, such as ditches and walls, that must be negotiated speedily by troops undergoing training or participants in an obstacle race.
2. designed to provide checks and balances to limit corruption.
It took less than six months for Brandejs's proposal to receive final approval in July 1992. While Brandejs himself believes the process was grueling and drawn out, it worked like lightning compared to the alternative. Although he had begun his restitution claim a year earlier, what U.S. court could manage such a complex matter so adroitly in such a flash? And the criteria that gave Brandejs's family the winning edge flowed from legitimate principles of law: His family did have a moral claim to restitution and his proposal, which stressed that the business would be run as a family operation in a long and proud tradition, was found as the superior productive use of the assets. The judicious outcome considered both equity and efficiency as positive social goods, the perfect signal to send a society in transition to a market economy.
The Hotel Pariz today exudes the tender loving care of grandpa Brandejs's own, having been renovated from January 6 to March 31, 1993. Antonin is very proud of this speedy renovation, considering that under socialist management the hotel was closed nearly seven years before reopening in 1987 - when managers discovered the missing bathrooms, leading to another two years of closure. Antonin works long hours and is a whirl of managerial energy. His brother manages the kitchen; his cousin's husband is an assistant manager. The hotel's staff of 130 has been kept on. But under the new management - and new work rules - some have decided to leave. Overall employment is up slightly, to 135, due to increased business. The occupancy rate Noun 1. occupancy rate - the percentage of all rental units (as in hotels) are occupied or rented at a given time
pct, per centum, percent, percentage - a proportion in relation to a whole (which is usually the amount per hundred) in October 1994 was 86 percent - superb.
The two managers who ran the hotel for the state are long gone, but both are prosperous. One serves as a consultant to the many new private hotels springing up to service Prague's booming tourist sector. The other opened a new restaurant. When I asked Brandejs where a civil servant would get the money to do that, he smiled: "You don't have to ask," he said.
So Czech privatization has largely overcome the Hayekian knowledge problem by encouraging competition among the very people most likely to have the relevant information. As Roman Ceska, the former deputy minister of privatization and current minister of the National Property Fund, puts it: "This is the only way to get information into the process. It was an open competition to submit a proposal. Everybody was invited - the municipalities, the companies, the consultants - and were giving us their ideas. This created a flow of information to the Ministry of Privatization. The only problem is that we were deluged with so many project proposals" - over five proposals for each of the Czech Republic's nearly 2,700 large state enterprises.
Under laws passed in February 1991, the newly formed Ministry for Privatization compiled a list of large-scale firms to be privatized. Managers of each firm - for instance, the Hotel Pariz's former state managers - were required to submit a "basic" proposal, including key legal and financial information, as to how to privatize the assets. Excepting only infrastructure industries such as the railways, hospitals, and utility companies, every Czech firm - even behemoths like the Kladno factory with 20,000 workers - was fair game for privatization. On November 1, 1991, the ministry published the names of more than 1,000 firms eligible for privatization and invited competing proposals from the public as to how each firm should be privatized. The deadline for submitting such proposals was January 18, 1992. (When an enterprise had no proposals, the ministry would create its own proposal, usually dumping the company's shares into voucher privatization.) The process ignited a flurry of political and financial activity and about 15,000 proposals.
This was a magnificent database for rationally - and quickly - divesting the state of its (potentially) productive assets. Insiders who submitted basic proposals had incentives to draw up coherent privatization plans because their proposals were subject to outside competition. In the end, insiders saw about half their proposals accepted - a much higher rate than that enjoyed by outsiders. The key to their success was two-fold: They provided relatively reliable information, and they relied heavily on voucher privatization. Competing privatization proposals tended to rely much more on direct sales to new manager/owners. Ministry officials, conscious that a surprising number of citizens were purchasing voucher coupon books, wanted to reward the general public as much as possible.
In selecting among rival proposals, the Ministry of Privatization was able to award property rights not in a perfect manner, but in at least a plausible way, one that avoided rampant confusion and chaos. Moreover, it realigned political interests: The instant the process began in earnest, thousands of prospective entrepreneurs (those submitting privatization proposals, each including some benefit to the authors) began to push hard for privatization. Since state managers were intimately involved in this competitive process, it removed them from the ranks of another competitive process: obstruction. In every other post-communist country, these apparatchiks form the core of opposition to reform: Why help privatize what you (as a state manager) can pilfer pil·fer
v. pil·fered, pil·fer·ing, pil·fers
To steal (a small amount or item). See Synonyms at steal.
To steal or filch. ? The Czech answer: If you don't help us privatize, someone else will.
Privatization projects included various means for transferring state assets to private owners: direct sales, tender offers, restitution, auctions, and voucher coupons. All told, about half of the book value of large-scale privatization was distributed via vouchers - $10 billion. Beginning October 1, 1991, Czechoslovakian citizens over the age of 18 were invited to purchase their 1,000-point booklet to use in the voucher privatization auction. These coupons were officially registered for 1,000 Czech Crowns ($35, about one week's wages) at over 650 outlets across the country.
In original surveys, only some 2 million participants were anticipated, and Western consultants and bankers pooh-poohed the idea in great spasms of laughter. The spectacle of hapless financial illiterates understanding market investments was just too funny. When Klaus, as finance minister, explained precisely what he planned to do with voucher privatization to a group of industrialists and financial experts in Vienna, Austria in 1990, the corporate bigwigs thought he was insane, reports Albert Zlabinger, an academic economist in Vienna who set up the meeting.
Yet some 8.54 million citizens - 71 percent of eligible purchasers - bought and registered voucher coupons. Enthusiasm was spurred by the spontaneous emergence of investment privatization funds (IPFs), some of which guaranteed 20,000 Crowns for those willing to turn over their 1,000-Crown investments. In the Czech Republic alone, 186 separate companies established 264 IPFs in the first wave (and another 353 funds in the second wave). They entered a competitive flay flay
to strip off the skin. to represent investor interests and advertised heavily, thus increasing demand for coupons. Some 72 percent of all the coupon points were entrusted to such funds in the first wave of privatization.
[TABULAR DATA OMITTED]
Actual bidding for shares began on May 18, 1992, three weeks before the elections which would catapult Klaus's Civic Democratic Party to power and place the economist in the strategic position of prime minister. Indeed, political opponents argued then (and now) that the mass privatization scheme was pandering to popular sentiment. A most splendid compliment, given the violent populism populism
Political program or movement that champions the common person, usually by favourable contrast with an elite. Populism usually combines elements of the left and right, opposing large business and financial interests but also frequently being hostile to established which has elsewhere sprung up in opposition to capitalist reforms.
The voucher auction was conducted in five rounds in the first wave of large-scale privatization, six in the second. On the first pass, each company's stock value was set at the same price (three shares for 100 points). If a firm's stock shares were oversubscribed Refers to connecting more users to a system than can be fully supported if all of them were using it at the same time. Networks and servers are almost always designed with some amount of oversubscription, counting on the fact that everybody does not need the service simultaneously. , the price on the next round was raised; if undersold un·der·sold
Past tense and past participle of undersell.
undersold undersell , then the price reduced. On the next round, bids were again registered, and adjustments similarly made. Whenever excess demand was less than 25 percent, shares were allocated to bidders on a pro-rata basis (with individuals favored over funds) and the issue taken off the board. This iterative it·er·a·tive
1. Characterized by or involving repetition, recurrence, reiteration, or repetitiousness.
2. Grammar Frequentative.
Noun 1. procedure continued until the final round. At that point, unsold shares were deposited in the National Property Fund, and oversubscribed issues were awarded on a pro-rata basis. The bidding in the first wave was concluded December 20, 1992.
The book value of the 1,491 Czechoslovakian companies scheduled for voucher privatization had been about 299 billion Crowns ($11 billion), although initial market valuations turned out to be roughly half that. Hence, the state was endowing each participating citizen with a stake in the new society, albeit something less than 40 acres and a mule - about $700 per voucher player (in the first wave) at November 1994 market prices.
And the physical process of transferring the assets went sensationally well. The daunting daunt
tr.v. daunt·ed, daunt·ing, daunts
To abate the courage of; discourage. See Synonyms at dismay.
[Middle English daunten, from Old French danter, from Latin task of evaluating firm values was handled smoothly and efficiently - by fund managers. These experts compete to be agents for investors for a modest percentage commission. The lack of sophistication so·phis·ti·cate
v. so·phis·ti·cat·ed, so·phis·ti·cat·ing, so·phis·ti·cates
1. To cause to become less natural, especially to make less naive and more worldly.
2. of Czech citizen-investors turned out to be a non-issue: Despite the prevailing skepticism and the virtually ubiquitous condemnation of mass privatization by Western policy analysts, the market institutions needed to make a non-traumatic transformation arose instantly in the newly privatized world. The mere existence of private assets spontaneously created - as if by an "invisible hand Invisible Hand
A term coined by economist Adam Smith in his 1776 book "An Inquiry into the Nature and Causes of the Wealth of Nations". In his book he states:
"Every individual necessarily labours to render the annual revenue of the society as great as he can. " - the means needed to manage capital shares.
Western experts had warned that giving away stock shares to citizens was doomed to failure because of the "dispersion" issue. Where stock ownership is so widely distributed Adj. 1. widely distributed - growing or occurring in many parts of the world; "a cosmopolitan herb"; "cosmopolitan in distribution"
bionomics, environmental science, ecology - the branch of biology concerned with the relations between organisms that no one party has an incentive to monitor the value of firms or the performance of managers, financial chaos reigns. Investment does not go where it is best utilized, and company managers tend to goof off v. i. 1. To shirk one's duties; to avoid work by relaxing or performing idle activities. . The classic example, of course, was state socialism itself: Although everyone "owned" state enterprises, such nominal ownership placed no effective constraint on managerial behavior; hence the state managers looted loot
1. Valuables pillaged in time of war; spoils.
2. Stolen goods.
3. Informal Goods illicitly obtained, as by bribery.
4. the enterprises they ran.
Yet the Czechs again relied on a bottoms-up strategy: Simply hand off equity ownership to individuals and allow markets to find a solution. Poland, on the advice of the World Bank, employed precisely the reverse strategy. There the state has searched for responsible new owners by attempting to place large state enterprises into 10 or so investment portfolios, to be managed by professional stock experts. The plan required agreement on how the funds would be structured as well as how assets would be allocated between them. The plan has been debated for four years.
Conversely, the Czechs simply let the market decide ownership structure. What spontaneously emerged was a competitive mutual-fund market. Hundreds of competing investment portfolios were created, with about 12 large funds accounting for half of total investment points. The competition keeps fund managers focused, and the funds' scrutiny keeps the privatized firms' management honest and efficient.
Restructuring companies that have been run for the benefit of state managers, often in conspiracy with feather-bedding employees, is a brutal task. Firm insiders will continue to depreciate depreciate v. in accounting, to reduce the value of an asset each year theoretically on the basis that the assets (such as equipment, vehicles or structures) will eventually become obsolete, worn out and of little value. (See: depreciation) the capital base unless confronted by well-informed and highly motivated monitors. To monitor managerial performance on the stockholders' behalf, Czech mutual-fund managers have climbed onto corporate boards, becoming intimately involved in managerial decision making. Each fund is, really, an army of takeover artists: It sets its agents upon state enterprises with the assignment to take the assets back for productive use.
Stanislav Ryska is a socialist manager who is happy to be a takeover target Takeover target
A company that is the object of a takeover attempt, friendly or hostile.
See target company. of capitalism. Director of development for Tonak, a Czech manufacturer of hats since 1799, Ryska was perpetually frustrated by the internal contradictions of socialism. Despite excellent export opportunities for its products, the state enterprise was at the mercy of another state firm, Centrotex, which had been given a monopoly over textile exports. For reasons known only to the bureaucrats themselves, increasing Tonak's exports was considered uninteresting (jargon) uninteresting - 1. Said of a problem that, although nontrivial, can be solved simply by throwing sufficient resources at it.
2. Also said of problems for which a solution would neither advance the state of the art nor be fun to design and code. . Freed of these shackles, Tonak's exports are booming - indeed, total Czech exports to the European community European Community: see European Union.
European Community (EC)
Organization formed in 1967 with the merger of the European Economic Community, European Coal and Steel Community, and European Atomic Energy Community. shot up 116 percent from 1989 to 1992 - and Ryska's salary is up 300 percent.
Managers are not supposed to take so kindly to the brutal efficiency-enforcers of financial markets. But good managers, of course, prosper more than ever; the cries of anguish come from those who lose their access to fluffy jobs, ill-gotten perks perk 1
v. perked, perk·ing, perks
1. To stick up or jut out: dogs' ears that perk.
2. To carry oneself in a lively and jaunty manner. , and socialized slush funds. Ryska, who now works closely with mutual-fund managers representing Tonak shareholders, is the pillar of corporate diligence, constantly on the alert for new export possibilities. Once suppressed by a system that rewarded mediocrity me·di·oc·ri·ty
n. pl. me·di·oc·ri·ties
1. The state or quality of being mediocre.
2. Mediocre ability, achievement, or performance.
3. One that displays mediocre qualities. on the job and subservience sub·ser·vi·ent
1. Subordinate in capacity or function.
2. Obsequious; servile.
3. Useful as a means or an instrument; serving to promote an end. off it, the entrepreneurial manager is today on the rise.
Competing privatization proposals for Tonak were submitted by the firm's managers. The winning proposal included a sale of 2 percent of the company's assets to a group of employees, with 78 percent of stock equity to go into voucher privatization. (Twenty percent of ownership shares were given to the National Property Fund, which pays restitution claims to people who cannot recover physical assets - for instance, those thrown in jail by the communists.) Emphasizing voucher privatization was a common ploy by managers who thought dispersed ownership would help keep them solidly in charge. But after the dust settled on five rounds of voucher bidding, 45 percent of Tonak's shares were owned by three mutual funds, with 24 funds accounting for 58 percent. Just 20 percent of shares are owned by individuals - fairy typical. Of the five members of the executive committee of the board of directors, three represent investment funds Noun 1. investment funds - money that is invested with an expectation of profit
assets - anything of material value or usefulness that is owned by a person or company (Harvard Capital & Consulting, the largest fund, Srejber Investing-Mutual Fund, and the Czech Savings Bank savings bank, financial institution that, until recently, performed only the following functions: receiving savings deposits of individuals, investing them, and providing a modest return to its depositors in the form of interest. ).
The new owners cut employment at Tonak from 2,050 to 1,750, mainly by attrition. About the same time, the firm's eastern export market collapsed: It shipped 30 percent of its output to Russia in 1989, but only 3 percent in 1993. Yet sales overall surged, and real output per worker - in just the first year of privatization - increased 20 percent.
The way in which it happened demonstrates the complexity of the economic system. The company's main product is furry hats made from rabbits. In fact, Tonak produces more traditional rabbit fur hats for Orthodox Jews than any other supplier in the world. Prior to privatization it had largely exported components to be assembled elsewhere. Since privatization it has been exporting finished product - with enormous marketing success. It has also found a ready market for its hats in...Australia, of all places.
Tonak has also rationalized its manufacturing, buying new Swiss machinery to monitor the quality of its skins and getting more final product out of each animal. Under state ownership, the factory used only 34 percent of each rabbit pelt pelt
the undressed, raw skin of a wild animal with the fur in place. If from a sheep or goat there is a short growth of wool or mohair on the skin. . Now, it plans to squeeze 75 percent out by the year 2000. Part of this efficiency push is motivated by a desire to economize e·con·o·mize
v. e·con·o·mized, e·con·o·miz·ing, e·con·o·miz·es
1. To practice economy, as by avoiding waste or reducing expenditures.
2. on the firm's waste-disposal fees. Labor practices are likewise adjusted; about 30 percent of employee compensation now depends on the number and quality of hats produced.
Each of these steps represents a step toward economic rationality, and it is the sum of millions of such tiny productivity gains that will stitch together the Czech Republic's coming prosperity. Each requires a modicum mod·i·cum
n. pl. mod·i·cums or mod·i·ca
A small, moderate, or token amount: "England still expects a modicum of eccentricity in its artists" Ian Jack. of imagination and an abundance of fortitude Fortitude
See also Bravery.
Fratricide (See MURDER.)
despite torture, refuses to deny Moses. [Islam: Walsh Classical, 35]
fulfills wifely and queenly duties despite losses. [Br. Lit. - there is always and everywhere resistance. Under state socialism, Ryska had to battle his managers, other managers, and Tonak's workers with each little push toward a more efficient world. Worse than enemies were his lack Of friends: Who will join the battle for social prosperity when all it brings is trouble?
But Stanislav has found some new friends. They are called stockholders and they - or their paid agents - conspire con·spire
v. con·spired, con·spir·ing, con·spires
1. To plan together secretly to commit an illegal or wrongful act or accomplish a legal purpose through illegal action.
2. with him regularly. "Mutual funds played a very positive role in reforming management," he says today. They supply a pressure for efficiency - a vacuum under socialist management. And while this new tension satisfies profit-hungry shareholders, it also serves the larger social interest. The new regime forces firms to be consumer friendly, to reward industrious employees, and to invest in productive assets and technology (no matter whose petty fiefdom fief·dom
1. The estate or domain of a feudal lord.
2. Something over which one dominant person or group exercises control: is challenged). This ruthless drive to economic rationality is what will finally yield the fruits of material prosperity in an advanced market economy, and it is today what fuels the striking optimism uniquely observed in the Czech Republic's recovery from communism.
Contributing Editor A contributing editor is a magazine job title that varies in responsibilities. Most often, a contributing editor is a freelancer who has proven ability and readership draw. Thomas W. Hazlett teaches economics and public policy at the University of California, Davis The University of California, Davis, commonly known as UC Davis, is one of the ten campuses of the University of California, and was established as the University Farm in 1905. . He has been a faculty member of the Foundation for Teaching Economics The Foundation for Teaching Economics (FTE) is an organization founded in 1975 that promotes economics education by hosting free workshops for high school students and teachers, and by providing educational resources to teachers. External links