International Business: Commentary
LESSONS FROM PRAGUE'S FULL-TILT RUSH TO CAPITALISM
Emil Mladek, formerly of Longboat Key, Fla., now of Prague, peers out of his communist-built apartment into the gray mist. It's May Day, a national holiday, and the retired Chicago commodities broker is recalling his emotional journey home to help the new Czechoslovakian government. At age 72, he has been thrust to the center of one of the great economic experiments of the decade. "When President Vaclav Havel called on us to come back, I never thought I would do something so important," he says.
Mladek is a principal in a scheme to make half the population "instant capitalists." It started on May 18, when 8.6 million Czechs began turning in coupons for shares, first for 10% of the state's industry, eventually for half of it. Mladek directs the second-largest of more than 400 private mutual funds that have sprung up to manage the investments.
Imagine what it would have been like if the U.S. government had offered every taxpayer the chance to buy a voucher for the $200 billion in busted real estate it got from the savings and loan collapse instead of selling the properties at auction. That solution was never considered in the U.S. But in Eastern Europe, where ownership debates have raged since communism collapsed in 1989, finding a fair way to sell off state property and shut down bankrupt factories is critical. Wary of doing this dirty work themselves, politicians are now throwing the choice to voters.
MORE STABLE? That's politically expedient, but is privatization by plebiscite good economics? The answer may be yes. Compared to the fire sales of telephone companies, airlines, and banks in South America to wealthy Latinos and foreign investors, it's slow and brings in no new money. But for countries with developing markets and no real capitalist structure, it's an important leap. If the voucher system fosters a broad-based people's capitalism among educated Eastern Europeans, it may create a more attractive place for investors than the quick-fix Latin deals.
Mass privatization also puts to rest the debate about finding a gentler "third way" between capitalism and socialism. Today, most Eastern Europeans want Western-style markets--the sooner, the better. In Czechoslovakia and Hungary, the personal savings rate has soared to around 12%, and a budding middle class is buying homes and family businesses. Private ownership of small business in Czechoslovakia has soared from zero to 10% in two years, and it's 40% or more in Poland and Hungary. Western cars, washing machines, and loose-fitting jeans denote the new lifestyle.
Across Eastern Europe resistance to selling off state industry is fading. With subsidies shrinking, even the former communists left at the state factories are resigned to privatization. But they want to do it gradually, while the voters want to accelerate reform. So, eager technocrats, with a clean slate to draw on, are floating some of the most radical economic ideas in the world.
Take the Czech scheme. Anyone with a voucher becomes a shareholder of a newly privatized business. Shares of up to 2,000 companies will eventually be traded, making it a mass education in markets. Many will lose the $37--about a week's pay--they spent for their scrip. Some will feel they sold their vouchers to mutual funds for too little. Others will get rich. The privatization will also be a national referendum on which companies will live or die: Businesses that fail to eventually attract new investors, either Czech or foreign, must close.
ENDLESS DEBATE. It's an experiment for Czechoslovakia's neighbors, too. In Poland, where the fate of state companies is mired in a debate among 29 political parties, the two best choices are to name a privatization czar or to use a mass-voucher scheme. Although the Hungarians have rejected the coupon system in favor of using 80 Western investment bankers to sell 2,500 companies, they, too, will weigh the Czech results.
What's most important for these governments is to maintain the momentum, says Karel Dyba, the Czech economic development minister. When Polish Finance Minister Leszek Balcerowicz showed how to free prices with "shock therapy," the Czechs quietly followed. Now, Czech Finance Minister Vaclav Klaus has staked his career--and campaign for Prime Minister--on the Big Bang. Although his plan worked, Balcerowicz was fired. Klaus's appeal is deeper: His scheme could be a model for Russia and the Baltics.
Selling industry has turned out to be much harder than freeing prices. Then, after everything's sold off, newly privatized factories and lumber mills will have to find ways to survive. Should they serve as low-cost producers for German and other European companies? Or should governments encourage them to specialize so they can compete in Europe and the global economy? Not long ago, such questions seemed light-years away. Today, you can bet someone in Prague, Budapest, or Warsaw is on the case.Robert J. Dowling and Gail E. Schares