Miloš Pick: Prague Spring versus the 1990s

22. 12. 2008 / Miloš Pick

The first lesson from the reforms is that the efforts at market socialism rejected, on the one hand, the pseudo-socialist dirigiste Stalinist system of an almost exclusively state controlled economy devoid (or virtually devoid) of a market-based approach, and on the other hand capitalism driven nearly exclusively by market forces with no (or hardly any) state regulation. Instead, the focus was on finding a third way – that of ‘state and market’. This was not a third way running between socialism and capitalism, because the non-market state pseudo-socialism of the time was not a viable form of socialism; the concept of the third way was a search for modern, practicable market socialism. It was a quest rather akin to the path which was being followed by the welfare state in the West, i.e. we on one bank of the river and they on the other were headed towards a common central current. We added a market approach to the ‘pure’ state, as modern rhetoric would have it, while they, rooted in capitalism, complemented the ‘pure’ market with the central role of the state. On both sides, then, we were aiming for a central flow from opposite banks, and hence we were heading towards each other.

However, we have been scratching at the surface. I will try to dig a little deeper. What did the role of the state – in conjunction with market forces – consist of in relation to this third way? It was not simply a question of ownership, privatization or collectivization. In my view, there are three different areas.

First, economic policy – not only macroeconomic Keynesian policy guiding demand by means of budgetary and monetary policy in the West and even in Czechoslovakia, but also largely an interventionist microeconomic policy. The welfare state in the West was more ambitious, as the resuscitating role of microeconomic interventions here was intended to go beyond the rescue of viable, albeit currently inefficient, businesses. In Czechoslovakia, it was presumed that this role would be played by middle management, corporations in specific industries, and a strictly defined state subsidy policy. Here, then, only a resuscitating role was anticipated; the audacity to engage in the aggressive microeconomic development policy practised by the Western welfare state was missing. One instance of this was Nokia. They took a state enterprise, drew up a development programme for 80 million mobile telephones a year, and only when they hit the 280 million mark did they start privatizing it. This also bears witness to the defining principles of these different approaches. In light of its past experience of unrestrained intervention, Czechoslovakia took a more wary view of interventionist policy.

The second area was ownership. The welfare state reckoned on the pluralism of ownership, comprising state, cooperative and private enterprises. These three groups of ownership were also envisaged in Czechoslovakia, although they were not specifically quantified. It is here that I see one of the principal innovative benefits of the Prague Spring – the ‘three-dimensional’ state enterprise. A commercialized state enterprise (i.e. not with uninhibited universal ownership), yet separate from other undertakings in terms of ownership and thus reliant on its own results. This was also a requirement for an enterprise to be in a position to operate in a parametric, market-formed environment, and its revenue position therefore hinged on satisfying purchaser and client demand, and on sales revenue from them, as set out by Ota Turek’s theory even before Kornai’s similar theory of hard budget constraints. The ‘three-dimensional’ form of state enterprise being introduced in Czechoslovakia at the time was particularly innovative; the company’s management board was composed of three equally-sized groups: workers' representatives, state representatives, and representatives of external entities. I believe this was a new development even compared to the Yugoslav, more cooperative-oriented managerial independence. Moreover, it was also an innovation compared to the West German works councils comprising half workers' representatives and half business representatives. There was also an element of subsequent Blair stakeholders alongside mere shareholders, a concept which includes the participation of external entities (regional authorities, scientific and educational institutions) with an interest in the development of an enterprise and decisions regarding the business. In my opinion, this common search for forms of plurality in ownership was our main advantage from the perspective of the future outlook too as, in a globalized economy, people are increasingly incapable of dealing with today’s multinational private companies.

The third area in my view is social redistribution. In Czechoslovakia, this was similar to the welfare state of the West, perhaps even insofar as the scope is concerned. Scandinavia redistributes more than 30% of its gross domestic product to health and social protection, plus approximately ten per cent to science and education. In Czechoslovakia prior to November 1989, this redistribution (at least in the field of social protection) also stood at about 30%. Following the post-November inflation shock, this figure shrank by a third to approximately 20%, where it has remained. The forms are slightly different – primarily insurance in Scandinavia and direct budgetary management in Czechoslovakia at the time. And the level of redistribution to science and research is only about half.

The comparison of this common quest for a model welfare state or socialist market system as a third way therefore revealed many shared traits and mutually graduated benefits. The most developed form of welfare state in the West – the Scandinavian model – remains, even in today’s knowledge society, the most social system not only in Europe, but perhaps in the world, and is more competitive than the North American capitalist model.

China, set to become the world's largest economy, is making an exceptional contribution to this search. I am in a position to attempt to characterize the third way of Chinese economic reforms only very approximately and sketchily on the basis of the patchy documentation available.

The market there is liberalized – external trade completely and the domestic market predominantly, perhaps with the exception of the largest strategic investments.

The state applies a macroeconomic policy where it influences demand by means of both budgetary and monetary policy, in particular by directly controlling the exchange rate. The microeconomic interventionist policy is applied primarily by way of a modern industrial policy exploiting and guiding the influx of foreign direct investments towards the principal planned priorities. The territorial, fiscal redistribution of the gross domestic product entails the reallocation of approximately one per cent of the GDP of modernized, developed areas to disadvantaged regions – much the same as in the European Union. As these regions lag much further behind, I expect the intensity of redistribution there to increase.

Pluralism of capital ownership is applied. The state, cooperatives and private owners contribute about a third each. There are moves to consolidate the largest strategic state enterprises into behemoths capable of competing with the largest multinational corporations. The state also promotes competition among state enterprises. If a state enterprise proves to be a loss-making business, once all possibilities of restructuring have been exhausted the state does not hesitate to wind it up and lay off the staff.

In contrast, the social redistribution of income – the lynchpin of the European welfare state – is still in its infancy in China. Pension systems, for example, are currently passing through an experimental stage to determine their viability. The reasons for this are related not to the architecture of the system, but to the present levels of poverty in the country, on a par with certain Asian tigers rather than the European Union. In this respect, the overall redistribution of the gross domestic product (including the interventionist policy above) via public budgets in China stands at a mere 20% or so, as in South Korea, as opposed to 30% in the US and other Anglo-Saxon countries with a neoliberal, ‘undersized’ central apparatus, 40% in the European Union and 50% in Scandinavia.

The three decades of Chinese economic reforms are one of the wonders of modern history. Yet political developments there are at a phase entirely different from that in the welfare states of the West. In Czechoslovakia, the Prague Spring ‘reached for the stars’ in pursuit of freedom, expressed by Milan Kundera in a debate with Václav Havel as the audacious objective not to settle for a return to western democracy, but to seek freedom unprecedented in the world, based on the still untapped potential of socialism – political freedom and liberation from social want. In contrast, the Asian tigers, including Japan, can thank the fact that, in their political liberalization, they did not forestall economic liberalization as one of the reasons for the economic achievements they enjoyed in their development phase. Gorbachev took the opposite approach and learned how difficult it is to skip individual stages of evolvement. Those who want to impose a similar course of action on China are tempting the same fate.

Equally important is the second lesson – that drawn from the suppression of the reforms being promoted at the time. The tanks rolled out in the name of the Brezhnev Doctrine started forcing us back down the path from whence we had come. The anti-reforms cast us back to a stage of development prior to the Prague Spring and belts were tightened not only in Czechoslovakia and other countries in the Soviet bloc, but globally. Even the West, instead of helping us against the tanks in line with certain naïve suggestions, chose a fundamentalist response similar to the Brezhnev hawks. It came up with the Washington Consensus, a package promoted by the International Monetary Fund, the World Bank and the US Secretary of the Treasury spelling out the doctrine for the shock restoration of capitalism. This agreement was mainly implemented by means of shock market liberalization, including the liberalization of foreign trade and the total privatization of capital combined with a macroeconomic restrictive policy of restraining demand in order to hold back subsequent inflation. It premiered in Latin America in the 1970s and was return at the beginning of the 1990s for application in post-Communist Central and Eastern Europe, i.e. including in Czechoslovakia. In this respect, I would avoid ascribing the reform to Václav Klaus – what we witnessed was a ‘faithfully’ reproduced Washington Consensus and voucher privatization copied from British Columbia, where it also failed.

The shock restoration of capitalism notably triggered an initial plunge in the gross domestic product by 20% to 30% in Latin America and by about a sixth in Czechoslovakia; Yeltsin’s Russia slipped to 50% of its previous GDP, Ukraine 40%, and other post-Soviet republics were hit even harder. For the sake of comparison, this decline was deeper than the severest peacetime crisis of the 1930s, when economies shrank by approximately 20%, and even more profound than in the worst period of the Second World War, when Hitler occupied a significant portion of the Soviet Union, but the economy slumped by only 30%. Naturally, the economies, including the Czech economy, started clambering out of this abyss, but in the long term this was largely driven by a transition to cheap labour and price undercutting – not only as a result of low wages, but primarily due to the extremely low exchange rates. This means undercutting where weaker economies actually subsidized – and continue to subsidize – more developed countries. I calculate that in the Czech Republic we have had to pay approximately 13% to 15% of our gross domestic product – and despite the current higher pricing levels we still pay to some extent.

This way a single superpower took control of the whole world, for the first time in human history according to Brzezinski. This process essentially came about peacefully, primarily by pledging democracy to the freedom-hungry people of the above-mentioned countries and by offering them this pseudo-reform and restoration doctrine. Even so, in regions with a complex ethnic mosaic – from the Balkans to the Caucasus and all the way to Indonesia – the economic and social crises thus unleashed degenerated into war and bloodshed.

Starting in the mid-1990s, this anti-reform groundswell in less developed countries culminated in capital forays to prune the European welfare state. Objectively soaring civilization costs of science and education, of prolonging human life, of health and of the environment are condemned as a consequence of welfare state profligacy, and attempts are made to cut the tax revenue channelled into public services, which are singled out for privatization even though this would make them more expensive and less accessible. This is the cause promoted by neoliberal theoreticians and politicians, assisted by the concessions of certain rightwing socialists, most notably Blair, offering as a third way a retreat from that third way.

However, this shock restoration of capitalism has now reached its limits. The unipolar world, providing powerful protection, is coming to an end; these anti-reforms are also faced with the problem of internal sustainability as a result of insufficient competitiveness and are losing social support. The current global financial and economic crisis is a further indication that the neoliberal distortion of globalization is not viable. After this wave of anti-reforms, there is hope that the world can refocus on reforms.

The factors underpinning the emerging reversion to reforms, which I have glossed over here, are substantiated by analyses. However, they are based on the implicit premise that the unipolar world’s hawks who are losing the peace will not succeed in switching developments to military antagonism, i.e. to a cold or a hot war. This could pave the way for catastrophic, even apocalyptic, scenarios. It is up to the people whether they continue to permit themselves to be manipulated by the powers that be in a situation where the world is increasingly turning away from democracy towards the global dictatorship of several hundred multinational corporations. I would like to believe that people will be active players in the pursuit of positive developments.

At the time of the reforms, the author primarily addressed productivity and the introduction of the five-day working week.

Previous version published at czech language in Britské listy on 17 October 2008 (Miloš Pick: Pražské jaro versus devadesátá léta ) and in Literární noviny on 8 December 2008

Miloš Pick: Pražské jaro versus devadesátá léta ZDE

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