Failed banking sector policies and weak regulatory policies are the keys to the collapse of the Czech economic “miracle.” Why were these policy errors made? Why has it taken so long to correct them? We examine the roles of economic interest groups, political institutions, technocratic economic ideology, and political leadership. Initially, economic interest group support provided broad liberal constraints on economic policy making. Within this context, neither political institutions nor technocratic economic ideology prevented political leaders from making the key early policy errors. A change in technocratic ideology made eventual error correction difficult to avoid. But stable economic interest group support and institutional divisions made it possible for responsible leaders to delay the corrections.
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References
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1. As discussed below, weak regulation facilitated the large increase in bad loans that developed during and after the privatization process. The bad loans inherited from the pre-1989 period were to a large extent covered by various state assistance measures.
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10. Internally, this should be more true for the richer Czech lands than for poorer Slovakia. World Bank, From Plan to Market, 188-189, 194-195.
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11. See note 3. Åslund, How Russia, provides some support for this argument in Russia. Joel Hellman, “Winners Take All: The Politics of Partial Reform in Postcommunist Transitions,” World Politics 50 (January 1998), finds the opposite pattern.
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12. One might expect such concerns to be constrained by electoral priorities of institutionalized parties. But parties too may have ideological goals for which they are willing to sacrifice some amount of electoral success.
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17. By the end of 1997, 58 percent of all large enterprises had been privatized via vouchers, as compared to 14 percent through direct sales to large controlling shareholders. EBRD, Transition Report 1998, 162.
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18. Martin, “Banking Reform,” 29; Simonson, “Large Bank Privatization,” 244. Banking sector policies sought to emulate Germany's. An independent central bank oversaw large banks. These banks were to combine short-term and long-term lending functions and, as both lenders and large shareholders, to discipline enterprise management.
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19. The bank-controlled IPFs came to control more than half of Czech industry. After the first wave of voucher privatization, “the big banks controlling investment privatization funds effectively controlled most of the important enterprises in the economy due to the spread of the remaining ownership rights among individual shareholders or smaller independent investment funds.” Čapek, “The Bad Loans,” 5.
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21. KB and IPB were the largest commercial banks. Under the old regime, ČS was the major retail bank collecting savings deposits and providing basic consumer services, and ČSOB was the monopoly provider of foreign trade services.
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Edward A. Snyder and Roger C. Kormendi, “Privatization and Performance of the Czech Republic's Komerční Banka,” Journal of Comparative Economics25 (August 1997): 97-128 .
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23. It was also important that until 1997, the IPFs were “closed-ended,” that is, shareholders could sell only their IPF shares, rather than redeem their investments in the underlying securities. As a result, IPFs eventually came to be traded at a large discount from the market value of their shareholdings. This also facilitated considerable fraud and embezzlement at smaller IPFs with no relations to the big banks.
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29. In a March 1992 speech, Klaus argued, Monetary policy may also be overly restrictive because of the conservative nature of our commercial banks.... We were always overcautious in the past in Czechoslovakia, and the overly conservative behavior of our commercial banks creates an additional problem that we have to solve. Václav Klaus, Renaissance: The Rebirth of Liberty in the Heart of Europe ( Washington, DC: Cato Institute , 1997), 78.
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30. Ibid., Renaissance, 45-49, 78-79.
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see also 143.
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Clemens Schütte, Privatization and Corporate Governance in the Czech Republic ( Northampton, MA: Edward Elgar , 2000), 104.
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34. World Bank, From Plan to Market, 44-65.
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35. It is worth noting that Poland's mass voucher privatization of December 1994 has been a success. This is due to strict regulation of bank lending and to tightly regulated and independent asset management by a small group of carefully vetted firms.
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38. As late as December 1995, Klaus (Renaissance, 54) reproached economists for having argued that high transitional unemployment was unavoidable. He credited the speedy mass voucher privatization for preventing it in the Czech Republic.
39.
39. The sale of the IPB stake cannot be considered a decisive privatization move, however, because the state had lost its control over the bank to a coalition of inside managers and a Japanese firm (Nomura). Insiders retained managerial control and did not reform the bank's lending practices. “Japanese Walls,” Business Central Europe, February 1999, 29-30.
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56. Similarly, the government had to transfer control of IPB to ČSOB because Nomura refused to accept responsibility for cleaning up IPB's balance sheet.
57.
57. Another complication was that the Slovak state owned shares in ČS and KB. However, Czech politicians were unanimous that bank privatization need not await settlement of outstanding claims with Slovakia.
59. Mass opinion was noticeably more right leaning in the Czech Republic than in Slovakia, which has only half the population of the Czech Lands.
60.
Švejnar, “Introduction,” 2-3.
61.
61. This is evident in the high levels of support for the center-right. This support persisted even following the second transitional recession of 1997-99. In many regions where the transformation promised greater unemployment, public support for the ODS and other center-right parties was weaker. The northeast mining region is a prime example.
62.
62. The Civic Forum included virtually all pro-democratic elements of the society and served as a special-purpose vehicle to dislodge the old regime and win the first election.
63.
Although a majority did not support a breakup in either the Czech or Slovak part of the country, neither was there strong opposition. In both parts of the Federation, the majority was apparently willing to sacrifice political union for the sake of salvaging its preferred institutional arrangements and economic policies. In particular, the Czechs were mostly hostile to Slovak efforts to prop up heavy industry. Carol Skalnik Leff, The Czech and Slovak Republics: Nation versus State ( Boulder, CO: Westview , 1997), 126-145.
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“Soudek's Last Stand,” Business Central Europe, September 1998, 28.
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“Skalický Sees No Reason for State Keeping Its Stake in Banks,” ČTK, 10 August, 1995.
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74. Blejer and Corricelli, The Making, 89, 127, 139.
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“Jezek to EBRD: Prague Security Markets Need Greater Security,” Prague Post, 24 April, 1996.
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76. As can be seen in Table 2, support for the center-right parties has remained virtually unchanged, even in response to the second serious economic downturn in 1997-99. Across the post-communist world, there is no other example of such consistent support for center-right parties.
77.
77. “Banks in this country should have been privatized to foreign direct investors fully and at the beginning of the reforms. But almost no economists (forget about politicians for now) called for it until 1994-95.” “ `After Battle, Everyone's a General.' ”
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78. EBRD, Transition Report 1998-1999.
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“In Whose Interests?” Business Central Europe, March 1999, 41.
80.
Václav Klaus, Obhajoba, 210.
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81. Blejer and Corricelli, The Making, 66-67, 105, 123. Klaus is usually viewed as an economic technocrat applying academic blueprints to Czech realities. But this seems inaccurate. When Klaus's self-described approach is compared to that of his Polish and Hungarian peers, he seems to be much more of a politician than a technocrat. Other economic policy makers discuss in detail how technical transition issues are likely to play out under local conditions and various contingencies. In contrast, Klaus outlines a simple reform model of stabilization, liberalization, and privatization. He is more concerned to organize a strong political party and to sell the reform model than to theorize about various technical issues and refinements: Economic reform is the hottest political issue and the reformers cannot sit in their offices and orchestrate the ideal sequence of reform measures. They must become politicians, create a powerful grass-roots political base for their policy, wage media campaigns defending the reforms and attacking their opponents. Blejer and Corricelli, The Making, 127.
82.
Steven Saxonberg, “Václav Klaus: The Rise and Fall and Re-emergence of a Charismatic Leader,” East European Politics and Societies13 (Spring 1999): 394, 397, 406, 416 .
