FROM BUSINESS WORLD OF 23 NOVEMBER 2005
Irrepressible libertarian
Unlike Vaclav
Havel, the grand old man of the Czech Republic, Vaclav Klaus, who succeeded him
as President in 2003, has a controversial image. Havel had made a name as a
dramatist before he entered the power structure; after becoming President he
espoused gentle, social democratic policies. Klaus, on the other hand, is a
liberal economist. He loves to fight powerful adversaries, and does it with superb
wit: “I believe in free speech rather than fair speech”. His tiny, landlocked
republic has no choice but to dissolve into the European Union which engulfs
it; but he has no qualms about arguing against the Union’s all-too-caring
social democracy or its hegemonist ambitions. At the time of its birth, the
Washington sisters, the Fund and the Bank, rushed to the rescue of the Czech
Republic. But their “aid” was really loans hedged with conditions which Klaus –
then finance minister – thought were poor economics. The Republic was in
desperate straits, but he refused, in his words, to pay hard money for soft
advice.
Ignoring their
advice, he devised a three-pronged privatization programme. Small enterprises
that had been nationalized were given back to their owners. Other small
enterprises were auctioned. But for the large enterprises, his ministry sold
voucher books of 1000 points for 1000 Czech crowns – about a week’s wages – to
all citizens; six million or three-quarters bought them. They could use these
points to bid for shares in any of 1774 government companies. If the number of
shares exceeded demand for them, they were allotted straightaway. If it fell
short, another round of bidding was held at a higher price; the process went on
until demand matched supply for the shares of all companies – a classic application
of Walras’s tatonnement. The experiment was not flawless; eventually, a high
proportion of the shares ended up with state-owned banks. But there was no
favouritism, and the privatization process was seen as fair by the people.
Recently, Vaclav
Klaus visited Delhi. As President, he should have followed the respectable
routine – being dined by our President, engaged in polite conversation by our
Prime Minister, laying a wreath at Rajghat, etc. But he also fitted in a talk
to the Liberty Institute. He drew three general lessons from the Czech
experience.
First, the role
of foreign aid is marginal, its form and structure are usually unsuitable, and
it is never free. The combination of interest and state guarantees makes loans
expensive for the receiving government. Donors are “not ready to watch reforms
passively, risking that their irrelevance will be revealed.”
Second, free
trade is crucial; fair trade is just protectionism in disguise. “The myth of
fair trade is that politicians and bureaucrats are fairer than markets. As a
politician and bureaucrat I have to say that I don’t want to play games with
the rules of trade.” Trade and migration are substitutes; if trade is
obstructed, people migrate. This is very relevant to our relations with
Bangladesh; if we let in Bangladeshi goods and services free of trade barriers,
fewer Bangladeshis would come to India.
Third, the basic
role of standards is to restrict entry into markets and competition. Standards
are a luxury; the income-elasticity of demand for them exceeds unity. They must
never be left to interest groups and NGOs. They must always be imposed by
politicians after a process of negotiations between the imposing and the
affected country.
Encouraged by
his uncompromising liberalism, I asked him whether he opposed the European
Union’s protectionism in its confabulations. He said that if you were knocking
on the doors of Delhi’s elite Golf Club for membership, you could hardly tell
it in the same breath to change its rules.
But that is
precisely what he does. Speaking to the Mont Pelerin Society in Reykjavik last August,
he expressed deep misgivings about the direction being taken by the European
Union: “The elimination of some of the
borders without actual liberalization of human activities “only” shifts
governments upwards, which means to the level where there is no democratic
accountability and where the decisions are made by politicians appointed by
politicians, not elected by citizens in free elections.” Earlier in June, he
told Paasikivi Society in Helsinki: “We need Europe of economic freedom,
Europe of small and non-expanding government, Europe without state paternalism,
Europe without political correctness, Europe without intellectual snobbism and
elitism, Europe without supranational, all-continental ambitions.” Bash on
regardless, Mr President! You are fighting for a good cause.
