Presented at the Pioneer Institute for Public Policy Research, Boston, MA, April 21, 1999

It is an honor to address this distinguished audience, it is an honor to be invited by the Pioneer Institute even if the term "pioneer" was for me most of my life connected with one special meaning ? with the communist youth organization with red scarves and with marching at the First of May parade.

It does not seem very productive to describe events that happened ten years ago at the moment of the end of communism or to repeat the famous debates about

  • where to go;
  • how to get there.

We have to go further now. I would like, therefore, first to put the transition problem into a broader perspective of the general ideological framework of our times and then to discuss several selected aspects of the process of transition.

The Re-Emergence of New Third Ways

We are ? very rapidly ? approaching the end of the century and the beginning of a new one. I do not like strong and easy but sometimes deceptive words and concepts but they may be appropriate when talking about the 20th century. We can say ? at least looking at the world from Central Europe ? that the twentieth century brought us two wars, two occupations of our own territories and two dangerous ideologies ? fascism and communism. We were three times liberated ? from the Austro-Hungarian autocratic monarchy in 1918, from German occupation in 1945 and from communism in 1989. Only three decades ? the twenties, the thirties, and the nineties ? were the episodes of freedom and liberty which is approximately one third of the whole century. Knowing the circumstances, it is very difficult to say whether it is a good result or a bad one. And especially as compared to whom or to what other era of our history?

I agree with Isaiah Berlin who once said that "horrors in the 20th century were not caused by the ordinary negative human sentiments, they have been caused by ideas". This is ? at least for me ? a very important point. I am really more afraid of some ideas than of nasty people, of wicked or evil persons, of villains. And I am sensitive to the dangers of personalizing history ? the current Yugoslav crisis not withstanding. And even if communism is over, I am not alone who sees, hears and feels ideas I consider dangerous. We should not, therefore, interpret the end of communism as a final and comfortable victory. We should be "on guard".

Contrary to the "end of history" or "end of ideology" schools, the end of communism does not mean end of the great ideological debate that dominated the 20th century. It began one. Or it should have. The debate should have taken place much earlier and should have been deeper and subtler, but communism distracted us from it. Looking around - in America, in Europe, in my own country - I do not have the feeling that someone like me (or the supporters of the Pioneer Institute) is on the winning side. I agree with one of the few of French liberals (in the European sense) Pascal Salin that "we are not the winners of the present time. So far the victory is that of social democracy". He is right. He sees Mr. Clinton, Mr. Blair, Mr. Jospin, Mr. Schroeder, Mr. Prodi (the new Mr. Europe) and I see Mr. Zeman and Mr. Havel in my own country. They all belong to the same club, at least implicitly.

The "Third Way" ideas are here again and I have to repeat my well-known phrase that was made in January 1990: "The third way is the fastest way to the third world". We should not fall into the same trap as in the past. But some of the traps are different ? I have to mention especially environmentalism and communitarism. Both of them represent a danger to freedom, liberty and democracy, both of them imply that someone?s ideas are better than the ideas of the rest of us and that someone knows what is good for you and me.

All of that is relevant for mature developed countries, for emerging markets in developing countries and for transition economies as well.

The Problems of Transition

The decade of the nineties started with many hopes connected with the fact that communism collapsed. I always add that it was not defeated, it ? sort of ? melted down. The long-time awaited event created enormous expectations and as a result of it, the e-r gap, the expectation-reality gap (see my 1997 Annual Hayek Memorial Lecture, IEA, London, 17 June 1997) ? in spite of many undeniable achievements in most of transition countries during the decade ? has been growing which led to a serious loss of confidence both of transformation results and of transformation strategies. Dramatic controversy about it continues and will be with us for some time to come.

I am sorry to say that western intellectual contribution to this debate has not been very helpful. There has been almost no serious academic research concerning transition from communism to free society, and the quality of available texts is not above the former sovietologist literature which we ? living in communism ? did not find very helpful either. We learned a lot from ideas and concepts belonging to mainstream economics but were not enriched by a more or less descriptive sovietologist literature which was usually less sophisticated than our own (which was done in a much more complicated environment). It seems to me now that almost everyone forgot the evils and irrationalities of communism and is surprised that its dismantling is not fast enough and that it takes non-zero time to replace it with a full-fledged market economy.

The academic analysis is made up for by a non-academic one. The debate about transition economies (and emerging markets) is dominated by a very powerful rent-seeking group of advisors and consultants, of investment bankers, of powerful auditors and especially of bureaucrats of international financial organizations who have a vested interest to prolong transition as much as possible, and not to let transition countries to do it domestically (which means without them). My refusal to unconditionally surrender to their views and my statement "I am not ready to pay hard money for soft advice" (which Milton Friedman dubbed "Klaus´s law") made me many enemies in this privileged group.

I have expressed my views about transition (and described my experience with it) in many speeches and articles and it is probably too early to add anything to my original "Ten Commandments of Transition" (luncheon address delivered to the plenary meeting of the Group of Thirty, Vienna, April 1993; also published in Renaissance: The Rebirth of Liberty in the Heart of Europe, CATO Institute, 1997). I will, therefore, make only several short remarks:

  • to paraphrase the well-known saying (ascribed to Milton Friedman) I can say that "there is no such thing as a free reform". The change of the whole system is very costly. The transformation costs consist of the loss of output (and income), of the fundamental redistribution of gains and losses in society, of the increase of inequality in income and wealth, the loss of behavioral patterns, etc. The costs have to be paid by citizens of the transforming countries themselves and the contribution of the rest of the world is marginal (if any and if not a negative one);
  • the reforms usually started with emphasis on liberalization, deregulation and privatization. Such reforms can be implemented quite rapidly. The implementation of such reform measures is of crucial importance, but at the beginning they created weak and shallow markets and imperfect market infrastructure. The inefficient (or not fully efficient) markets and surrounding institutions increased transformation costs and added something unexpected to the unpleasant feelings of less successful participants of the transition process. We are, therefore, heavily criticized for weak markets and imperfect institutions, but there was no other way to proceed.

In addition to it, our distrust of the state and its potential positive, constructive contribution was much stronger in our part of the world than in yours. In the past we suffered more from "government failure" than you and we believed in the idea that market failure is much smaller and less dangerous than the failure of government. Karl Brunner once said that the state should be "an umpire of a positive sum game and not an operator of a negative sum game" and we accepted this approach as a guideline in our reform strategy;

  • many reforms failed or had very high costs because of their partiality and because of the time-inconsistency problem connected with the fact that individual reform measures have different time dimensions. This is an unavoidable fact of life which should not be so superficially criticized as it is usually done with the high-brow approach of those who either do not care or have there own interests;
  • we understood very soon the fallacy of the artificially introduced dilemma called "shock therapy vs. gradualism" which used to be so popular in the literature. I can confirm that the systemic change is a sequence of many distinct choices over time on separate components of an overall reform plan and not a single decision. It takes a whole historic period. It is not an exercise in applied economics. The systemic change is not done in a laboratory or in a vacuum, it is done inside a very complicated political process in an open, democratic and pluralistic society (there is no masterminding of it);

What are the main future dangers?

We should be aware of the fact that the country in the moment of transition does not make marginal changes (as a non-transition country), that it makes substantial changes. This is a crucial difference. There has not been a long, gradual, spontaneous evolution of institutions, rules or networks of relations based on the enormous variety of human interests, hopes, dreams and ambitions as in your country. Because of that, we still live in a "pre-emptied" system that does not have the friendly, softening mechanisms of intermediation between invisible hands of the market and visible hands of the government. Such an intermediate structure cannot be imposed upon society from above, it has to evolve. In our society, the strong and noisy pressure groups often succeed in using legislation for gaining powers and priviliges at the expense of both individual citizens and the state and for shifting society from traditional liberal democracy to neocorporativism. It has an important connection to the currently fashionable idea of communitarism (which I already mentioned). Communitarism is less dangerous in a mature, sufficiently diversified society but may very easily refeudalize society in an unmature (and in this respect shallow) society (see my speech at the Alpbach Forum 1998 Seminar devoted to "Society and the Crisis of Liberalism", 22 August 1998; published in Policy, No. 4, Vol. 14, 1998, Sydney).

Second future problem is connected with the existing (and unavoidable) fragility and vulnerability of transition economies especially when they are confronted with the growing and merciless requirements of a globalized environment. The transition countries have particular propensities, especially to higher inflation and to current account deficits (see my speech "Emerging Markets and Their Current Problems: The Czech Perspective" delivered at the Delhi School of Economics, New Delhi, 11 March 1999) which are not compatible with fixed (and stable) exchange rates. Transition economies have, at the same time, investment-savings imbalances and need foreign capital to ensure some sort of macroeconomic equilibrium. Foreign capital wants, however, fixed exchange rates and easy outflow´s possibilities. All of that does not simultaneously exist and will probably never exist.

My experience tells me that the reconciliation of all those variables cannot be masterminded ex-ante. It must be enforced upon the economy ex-post, as a result of economic, financial and currency instability (or crisis). It brings about, however, a politically and socially very complicated situation and, as a result of it, the political support for the continuation of transformation is undermined. This is what we have seen in recent years in many countries, and paradoxically more often in more successful transition economies.

The problems of transition can be discussed with many details and from many perspectives. Transition is a very complicated mixture of political, social, economic and cultural aspects and a mixture of intended and unintended moves and events. I wanted to warn against their underestimation, against various misinterpretations, against false labels as "the absence of the rule of law", "crony capitalism", "mafia capitalism", etc. I wanted to present it as painful process connected with dreams, hopes, ambitions, prejudices, fears and, of course, errors of human beings. I agree with Hayekian statement that world is run by human action, not by human design. We should not forget it.