20th Anniversary: Privatization and free market economics

When I arrived in Prague in November 1993, The Prague Post was still located in the old Communist Party headquarters close to Wenceslas Square, in a maze of dusty offices where the working-class bureaucrats and politicos looked at us as a cadre of foreign counter-revolutionaries.

As the business editor, the strangest thing was that, from that setting, we were covering the ongoing transition from communism to capitalism, as Václav Klaus' government was in the midst of a massive wave of privatization. Within a week or two of my arrival, the Prague Stock Exchange was launched, which to many Czechs held the promise of quick riches, since everyone received shares in the formerly state-owned companies. Unfortunately, many of the shares soon proved to be worthless, and those that weren't were scooped up by pirates - both foreign and domestic - or amassed into mutual funds that were often designed like mass pyramid schemes.

On the other hand, the Czechs did much better with their stock market than most other Central or East European countries, often despite all the "help" they were offered from abroad rather than because of it. One of the things I found interesting was the wave of American financial missionaries who flooded into the republic, offering advice that was often best forgotten. When the late Milton Friedman showed up in Prague -- a nice, friendly guy who stood at least a half-meter shorter than most Czechs, with an equally diminutive wife -- he came preaching the Gospel of the Free Market, which was about as unrealistic as other gospels the Czechs had heard before.

Friedman's idea was to run the country with an absolute minimum of regulation. "Don't make the same mistake the United States made," he said as the Czechs launched their stock market. "Don't create a Securities and Exchange Commission." He and I actually got into an argument (being business editor of The Prague Post actually provided enough clout to disagree with a Nobel Prize winner), and fortunately the Czechs ignored his message and decided to regulate the stock market.

The Poles, on the other hand, listened to Friedman and created very weak financial regulations. As a result, their stock market was immediately overrun by pirates and thieves, causing a near-collapse of the economy, pushing Lech Walesa out of office and paving the way for a "free-market communist," Aleksander Kwasniewski, to take his place. Friedman wasn't the only missionary.

Harvard's Jeffrey Sachs also showed up, trying to convince the Czechs to water down their social safety net and government regulations so their economy could expand like the so-called Tiger economies of Asia, which Sachs had also advised. He and I also got into an argument -- I boldly predicted that the Tiger economies would soon face severe financial difficulties because of their policies. Unfortunately, the meeting took place at a reception where copious amounts of alcohol were being served, and I am afraid my economic arguments were not totally coherent. Nonetheless, roughly a year later, the Asian economic crisis began, totally deflating the Tiger economies. The Czech Republic was also hurt by this -- as were many emerging economies -- but avoided the worst of it because the Czechs refused to be too doctrinaire about their transition away from state control.

And economically speaking, that's really the thing I remember about Prague: the attempt to carve out the Third Way between the old Soviet Union and U.S.-style capitalism. I hope the country's independent streak continues.  

The author was business editor of The Prague Post from 1993 to 1996. He is currently a reporter and columnist with The San Diego Union Tribune and was part of an investigative reporting team that won the 2006 Pulitzer Prize.      

Dean Calbreath can be reached at
news@praguepost.com