#Lukáš Kovanda, Ph. D.

Brussels is Moscow with a Human Face

Barack Obama is an intelligent socialist, the economics of Jan Švejnar is inferior, and Václav Klaus is a pioneer, says SVETOZAR PEJOVICH, Professor Emeritus at Texas A&M University.

Several years ago, you led an expert discussion with Václav Klaus and Dušan Tříska about Czech privatisation.  What do you make of people who criticise it “from the right” and point to the process not having been thorough enough, to “banking socialism” and other phenomena?   

Being clear the next day about how football players should have played in their Sunday match is easy.  Klaus had to cope with a problem that no one else had dealt with before.  In that sense, he was a pioneer.  Of course, he did things that he might not do the next time over.  But to say that he made mistakes, that sounds as if he knew the alternatives and only selected from them poorly.  But he was developing new ideas, a new system, and new methods.

What do you think of Klaus today?

I very much value his attitudes to global warming.  I think that he is right there – I agree that the Left is deliberately politicising the issue.  He is also entirely right as concerns the European Union – that this supranational unit disrupts the sovereignty of countries.  It took forty years for you to get out from under the rule of the Soviet Union and you are again launching yourselves under the rule of Brussels.  The only difference between them is that Brussels is Moscow with a human face.

HE APPRECIATES KLAUS. “I value his attitudes to global warming and the European Union,” says Svetozar Pejovich.

And your view of Jan Švejnar?

I do not like his concept of economics.  I know that he was adamantly advocating a greater interest for employees in the economy.  I think that he believes that the government should be a key partner in the economic process.  I, on the other hand, claim that the legal framework is the most important.

Švejnar says about Klaus that from the global point of view he is not a significant economist, because he never published in any important specialised world journals.

What nonsense!  Klaus was at the head of a country when it was recovering from forty years of communist bondage.  How can someone want him to also devote months of strenuous work to writing scientific articles while working on such a demanding task?  If he did that, he would not be able to work for his country.  Simply nonsense!  And secondly, I think that Švejnar has devoted his life to scientific work, but his entire output has been studies that make economics inferior.

In spite of that, do you think that privatisation could have turned out better?  One of the reasons that it did not happen was that the country was not de-Communised at the same time.

Yes.  In Germany, de-Nazification took place after the Second World War.  Many big Nazi bosses were sentenced to death and the Nazi Party was declared a criminal organisation.  The Communist Party in your country was not, although the Communists had caused an even greater disruption than the Nazis.  No member of the politburo, as far as I know, was sentenced to death.

De-Nazification could have been more thorough, too.

It was weakened by the Cold War: both parties needed German experts.  But in spite of that, it happened.  Such an act is not a matter of revenge.  It is a warning for the future: if you sentence criminals to death, potential future criminals will think twice about whether they will commit something like that.  If it does not happen – like after the fall of communism in Central and Eastern Europe – the people who for forty years persecuted others (for instance, those, who wanted a free market) are suddenly able to take advantage of the free market themselves.  I am also convinced that the people who actively functioned in a centrally planned system for forty years developed certain habits.  Even if their conversions were sincere, which is often quite questionable, their intuitive response to any given problem will always be “what should the government do about it”, not “what can the market do about it”.

You also claim that privatisation was not as successful as it ideally could have been, due to the supremacy of the neoclassical paradigm in economics.

I do not want to blame everything on neoclassical economics in general.  The Chicago School, too, works with neoclassical models, but it helps us better understand the advantages of properly functioning ownership rights and of the free market as such.  The problem of neoclassical theories lies in that they were not too useful at the time of the transformation.  The theories presume one set of institutions – ownership rights – and zero transaction costs.  I think that a transition period requires a different method of analysis – an analysis from the point of view of new institutionalism.

You say, however, that privatisation in the form of vouchers was just.  More just than direct sales of property to foreign investors, arranged by the government, or strategic partnerships.

When the Communists got to power, they stole property that belonged to others.  They also decided about what would be produced.  They had economic power.  Anything that was created in Czechoslovakia and in the socialist bloc in general was created on the basis of the decision of communist parties.  It was not based on the free choice of individuals.  As soon as the change came, I think that people deserved to be compensated for the forty years of hardship.  And I think that having equal chances to participate in the privatised assets was such a form of compensation.  That is why I do not like sales to foreign companies, strategic partners.  It is possible that certain people will not understand the purpose of the voucher, but you cannot control that.  What you can control is giving everyone an equal chance to get a share in the privatised property.  And the voucher privatisation met that.

For example, Joseph Stiglitz (the Nobel Prize Laureate in Economics from 2001, note by L.K.), however, thinks that because of the form of privatisation chosen, the gap between the poor and the rich is opening up, which is not optimal according to him (see also Stiglitz on Privatisation).

I would like to know when I last agreed with something said by Stiglitz.  First, there is no economic theory that would claim that egalitarian redistribution is better than a less egalitarian redistribution.  Second, if an economy is growing in free conditions – such as the Czech economy was after the fall of communism – it can be expected that some people will take better advantage of opportunities than others.  The outcome is inequality in income.  The opening up of the gap is simply an attending phenomenon of growth.  Personally, I would not have proposed Professor Stiglitz for the Nobel Prize.

Svetozar Pejovich (78)

He was born in Belgrade and studied law.  In 1957, he left Yugoslavia and settled in the USA, where he graduated in economics at Georgetown University in Washington.  He lectured at universities in Minnesota, Texas, Ohio, and at the Hoover Institution in California.  Then he again returned to Texas where – as he says – he found his second home.  “People in Texas are strong, they believe in themselves, and do not rely on government help.  They are open and say what they think, which is not always entirely pleasing.” Now he is a Professor Emeritus at Texas A&M University.  He has three children of his own and in 1990 he and his wife adopted a girl from Montenegro.

Where do you see the key cause of the present crisis?

It is clear, I think: the government is to blame.  The Clinton administration forced banks to give mortgages to people who in fact could not afford them.  That, in and of itself, could have been a negligible problem.  But what happened was that banks made access to credit easier in general, to individuals and companies – and loans then went to people who were perhaps not entirely poor, but who were unable to repay the debt, and who were only speculating on the houses.  It is not that the private sector did not make mistakes.  But private companies usually pay a price for their mistakes – they bear the costs of their mistakes.  Governments do not.

What do you make of how governments are addressing the crisis?

As usual: they are spending money that could have been expended much more usefully.  When Ronald Reagan became president in 1981, the interest rate was very high, and so were inflation and unemployment.  Growth was stagnating, industry dropping, we were losing competitiveness.  Did Reagan try to spend?  No, he cut social expenditures and reduced taxes significantly.  Growth came within two years.  And then the economy continued to grow for many years.

Many economists say, however, that this crisis is the worst since the Thirties, that is, also far worse than anything that was happening under Reagan.

Yes, Obama is proclaiming that this is the worst crisis of all time.  That is not true.  It is by no means worse that the one Reagan faced.  But the approaches are entirely different: Reagan did not give out any money for bail outs.  He did not increase government expenditure – aside from military expenditure, but that was an investment into settling with the Soviet Union.  Obama is the exact opposite.  Although he claims he is not, he is increasing taxes, primarily for the most productive classes of the society.  He spends money on such a level that the government must expect inflation to go up significantly, or that one day he will have to declare insolvency.  Obama will cost America pretty dear.

Do you therefore expect strong inflation in the upcoming years?

I think it was Stalin who said: “Only make predictions whose invalidity can only be shown after you are dead.”  Predicting anything in the social sciences is very dangerous.  The parameters are changing.  But what can be predicted is that if Obama indeed does what he is planning, then inflation will really go up.  His philosophy is: take away from the more productive, give to the less productive.  He talks about various social programmes, support for education, support for healthcare, and about government energy policy.  But not a single one of those programmes is capable of getting us out of the crisis.  It is just an attempt to move decision-making processes from the market and from the level of individual states to Washington.  Obama is an intelligent socialist; he is using the crisis as pretence for this move.  He is preparing a fundamental change of the economy in a style that Mr. Švejnar would like.

OK, but how is that related to the threat of inflation?

The deficit is growing at a previously unseen rate.  The deficit can be financed in one of two ways: either by selling government bonds or by printing money.  If the deficit grows enormously, there must also be an enormous number of those who will buy the bonds.  And where will America find them?  Countries like China are beginning to fear any further accumulation of those bonds quite a bit, because they realise very well that the USA may declare insolvency or have significant inflation that will reduce the value of the bonds.  And if it is not possible to sell bonds, then money has to be printed.  And that is an inflationary measure.  Inflation is like pregnancy: there are many explanations, but only one factually possible cause: here, it is the increasing of the amount of money in the economy.

But many economists are now warning against deflation much more.

I don’t understand that.  We must distinguish which schools of economic thought are afraid of deflation.  We must distinguish economic and political stances.  During a recession, a drop in prices must be expected.  But I would not call it deflation.  It is simply the consequence of a recession.  Obama is trying to get us out of a recession through inflation.  I would definitely not see a threat in deflation.  I would not even employ those economists who are working for Obama at the school where I lecture.

Many of the people were already in Clinton’s administration, such as Larry Summers.

Larry Summers is, above all, a political figure.  He defends institutions such as the International Monetary Fund and World Bank.  And those two institutions harmed third-world countries more than anything else.  The fact that people like Summers are in power is a tax for the victory of the Democrats in the US presidential election.  Read economists other than Summers and you will get an entirely different picture of what is happening now.  But they have a divine right to make those interventions in economic policy – which, in my opinion, spell doom for the future of the USA – because they won the election.  I really do believe that the next election will bring a huge change in terms of the preferences of the middle-of-the-road voter.  In the end, Obama will not differ that much from Bush.

You are afraid of the links between governments and large financial institutions.  They, you say, definitely do not help in the resolution of the crisis.

Large companies need a helping hand from the government.  I know about smaller banks in Texas that did very well, but they were literally forced to take government rescue money.  Because if it were that some banks were rescued and others are not, people could tell who is really in trouble.

Stiglitz on Privatisation

You criticise the Czech voucher privatisation.  Could we have avoided the losses connected to it?

Certainly.  That process did not create a truly competitive and market economy.  Historically, the Czech lands have faced the problem of inequality; they therefore had experience with it, which after the fall of the Iron Curtain gave them a chance to create a market, but also a relatively just, egalitarian – simply cohesive – society.  Of course, there will always be a certain degree of inequality – people have different skills, different conditions.  The Czech Republic did not inherit from the past the burden of a broad social gap.  It did not manage to create a market economy that would be at the same time cohesive, but an economy that is struggling with all of the problems of a type of corporate governance.  The Czech Republic now has a reputation as a not very good region in terms of corporate governance.  In fact, it has a bad reputation.

Do you think that its reputation among investors, too, is poor?  The Czech economy is still doing relatively well.

True, the Czech Republic is doing well economically, but primarily thanks to its European Union accession and the geographic proximity of Germany, which is- primarily in terms of exports – the economic engine of all of Europe.  The Czech Republic has a high-quality labour force from an earlier era.  Simply put, at the beginning, the country enjoyed a great advantage, but it chose such a method of shock therapy that it was not able to develop human capital and it underestimated matters such as corporate governance.  It was saved from the worst by objective factors such as geographic locale.  In terms of what the country could have achieved, it is a great disappointment.

The Czech Republic is doing well even in comparison with other countries in the region, which had been struck by a similar fate.

Yes, other countries also have problems, but the Czech Republic really did not manage its privatisation the best.

The problem, you say, consisted of the method of Czech privatisation, which was relatively specific.

Voucher privatisation was very poorly managed.  It was connected with a number of problems.  The original idea made some sense, which, however, disappears when it comes to the question of how to implement it all.  The original idea was that you will redistribute wealth and create a relatively egalitarian capitalism.  But everything was done before acts on corporate governance and investor protection were enacted.  Hence all of the siphoning and other negative phenomena.  It was all executed naively.  And I do not know whether that naivety was intentional, or not.

Could there have been pressures for the naivety to have been intentional:

Yes, some people are doing relatively well.

An excerpt from the author’s interview with Joseph Stiglitz, which was obtained in New York and published in TÝDEN No. 38 on 22 September 2008.

An abbreviated version of this interview obtained in Prague was published in Týden No. 29 on 20 August 2009.

Sign up for my economic commentaries