FROM BUSINESS WORLD OF 23 NOVEMBER 2005
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.