The acerbic statesman.

Without a doubt, Vaclav Klaus is the most controversial figure in the transformation of Eastern Europe. Supporters describe him as a democrat, a freedom fighter, and a market reformer. Critics, however, insist he is a political adventurist who bears primary responsibility for the breakup of the Czechoslovak state, creates a multitude of enemies at home and abroad, and preaches drastic market reforms but sometimes follows a cautious path.

What is the truth about Klaus' policies and influence, and the transformation o the Czech Republic under his guiding hand?

When the dust settles, the Czech transformation may prove to be the most successful in the region. In 1991, Czechoslovakia achieved macroeconomic stability through sweeping price and trade liberalization, and radical monetary and fiscal austerity. Klaus usually claims he was the first and only head of state to pursue such a course. This is inaccurate: Poland's Leszek Balcerowicz followed the same path a year earlier. It is true, however, that the Czech approach has been more stringent and sustained than any other; consequently, some projections show the country will be the first in the Central European region to achieve single-digit inflation. (According to Austria's Credit-anstal International Advisers, the Czech inflation rate this year will be 11 percent, compared with Hungary's 19 percent and Poland's 31 percent.)

Of course, Klaus had a head start, having inherited the most balanced economy o the three and one with no external or internal debt. Nonetheless, in hindsight, it is safe to say that he was right, and that the Keynesians who pushed for demand-side stimuli were wrong. Discipline has helped the Czech economy to grow in a debt-free environment, and leaders of the republic now have room to gradually decrease taxes and--perhaps most important--to reduce extravagant Social Security contributions. This, in turn, will attract more investment. Among all European countries, only tiny Luxembourg and non-EC members Switzerland and the Czech Republic currently meet the macroeconomic criteria agreed upon in the Maastricht Treaty.

But more direct foreign investment is badly needed: The Czech Republic's abilit to attract such investment has been disappointing, particularly considering its low wages and proximity to Germany and Austria. Direct foreign investment has slowed from an already low level in 1993; this indicates flaws in the Czech strategy. Both Poland (population 38.5 million) and Hungary (10 million) outpac the Czech Republic in attracting direct investment. The Czechs absorbed a mere $517 million in 1993, while Hungary--with roughly the same size economy--attracted more than $2 billion.

One of the key achievements of the Czech transition is that Klaus managed to keep wages very low. That might be a powerful incentive for DFI; however, the process of privatizing companies by auctioning vouchers to the public does not allow sufficient room for foreign bidders. (The process also relies heavily on the secondary market to redistribute shares to efficient, new owners.)

There is another effect to the wage policy: Low wages enabled Prague to slow microeconomic transition on the enterprise level. One result: The failures of giant businesses that resemble their overcentralized, pre-privatization predecessors have proceeded at a slower pace than in Poland or Hungary. In time these firms may hamper growth. But overall, the impact of wage controls has bee positive, particularly with regard to inflation.

Direct foreign investment also has been hamstrung by the Czechs' deep suspicion of foreign ownership. It hasn't helped that several high-profile privatizations have had to be reversed, including the sale of a stake in CSA, the Czech national airline, to Air France.

Meanwhile, Klaus sometimes has been less than the consummate diplomat. The desire of he and his ministers to go it alone on a range of issues periodically has raised hackles among neighboring nations. For example, while Klaus' opposition to the institutionalization of Visegrad cooperation placed him decidedly on the side of free trade, it also left him appearing isolated and arrogant. Outside Central Europe, the most vivid example of Czech shortsightedness was its attempt to parlay President Clinton's visit to Prague last year into a one-on-one summit. The trip was intended by Washington to demonstrate U.S. solidarity with the Visegrad countries. Subsequently, talk intensified in Hungary and Poland about leaving the Czechs out of Visegrad altogether.

In sum, though the Czech Republic's economic transformation is encouraging, the jury is out on its ultimate success. Moreover, its prospects remain somewhat clouded by miscommunications and a tendency to overpromote its achievements.

Kalman Mizsei is vice president and director of economic programs of the Institute for EastWest Studies, which has offices in New York, Prague, Budapest Warsaw, and Atlanta. A Hungarian national, he is a former adviser to the president of Hungary's National Bank.