Shock therapy capitalism marks 20th anniversary

11-01-2011

Twenty years ago, in January 1991, Czechoslovakia began a crash course in capitalism as the old system of central economic planning that had been in place for the previous four decades was dismantled. In spite of resistance from some quarters, Czechoslovakia, opted for a fast, shock therapy reform, differing from the more cautious path taken in Poland and Hungary.

The new year of 1991 brought many surprises for Czechs and Slovaks. Price reform took effect from the start of January meaning that the old system where prices were dictated and regulated by the state largely disappeared. Shops were allowed to charge what they wanted and shoppers were faced with the unaccustomed pleasure and challenge of, well, shopping for the best quality and prices.

Price reform was a victory that had been won at the tail end of the previous year by the advocates of shock therapy economic reform, headed by the then federal finance minister, now president, Václav Klaus. 1990 had largely been devoted to constitutional reform and the first elections following the toppling of the Communist regime at the end of 1989.

But the proponents of shock therapy and a fast path to capitalism won a much more important battle at a meeting of Civic Forum, the broad post-revolutionary group, that started on January 12 in a Prague suburb.

Pavel Kohout is an economist and member of the government economic advisory council, NERV.

“In short, we can say that 20 years ago, in 1991, the era of capitalism began in the Czech Republic, or Czechoslovakia as it was then.”

Pavel KohoutPavel Kohout Basically, Václav Klaus imposed his free market, liberal, views as Civic Forum policy, at that meeting, defeating centrist and left of centrist opponents, including economists who had tried to reform the communist economy in 1968.

Many of those opponents could not stomach the chosen path of the disciple of monetarist Milton Friedman and admirer of British prime minister Margaret Thatcher. Civic Forum quickly splintered under the strain.

As well as price reform, the privatization of small shops and businesses was undertaken together with the first steps to overhaul the tax system.

In the meantime, ordinary Czechs and Slovaks seemed to accept the shock treatment and promises that there would be no gain without pain. Pavel Kohout recalls the reaction to the steep prices rises that accompanied deregulation.

“I remember that there were very few complaints about that at the time. Almost everyone knew it was necessary to demand some sacrifice in so as to introduce a new and better economic system. Actually, very few people complained about rising prices even though the inflation rate in 1991 was well over 50 percent.”

As well as rapid inflation, the economy also shrunk by 14.2 percent in 1991. But the following year price rises were curbed to 11 percent and the worst of the recession was over.

Mr. Kohout reckons that the right steps were taken at the right time with the economic pied piper, Mr. Klaus, only losing the plot when his overweening belief in the market caused him to dismiss any regulation of the developing capitalist system. But the shock therapy of January 1991 still creates a lot of sparks and argument about whether it really was the right way to go.

11-01-2011