Remarks by Vaclav Klaus, President of the Czech Republic
12 November 2010Remarks by Vaclav Klaus, President of the Czech Republic — Reception house of Ministry of Foreign Affairs of the Russian Federation

Alfa-Bank and Oxford Said Business School Award Ceremony For Excellence in Foreign Investment in Russia — 2010.

Ladies and Gentlemen,
Let me start by stressing that it is a great pleasure for me to be here tonight.

The invitation I received from the Alfa Bank was for me in one respect rather special. In the last twenty years, I have been speaking all over the world, but this is the first time I came to Russia just to make a speech. All my other visits here were official. The question is why it is so. What is different here? Why have I been speaking almost one hundred times in the United States of America, at least fifty times in Germany and Austria, many times in England, Italy and other countries, but not here? Is it because of Russia, because of me or is there another reason for it?

It was — hopefully — not my fault. I do not have any aprioristic prejudices. I do not live in the past. I do not mix the present Russian Federation with the Soviet Union of the previous era, or the current political leaders with Leonid Brezhnev, as some people in the West and in the Central and Eastern European post-communist countries do in an attempt to score cheap political points in their home countries. On the contrary, I have been following the developments in this country in the last two decades with great interest and with — I hope — a sufficient modesty and respect. For that reason, I do not have a patronizing attitude of those who consider themselves the «majitele klicu» (the owners of the keys, to quote the title of a well-known Milan Kundera?s drama) of the world, freedom, democracy and a decent civic society.

I consider the developments of the last two decades here in Russia to be a relative success — when we look at it with a proper and fair historical perspective. The alternative benchmark is for me Andrei Amalrik’s horrifying story in his well-known book Will the Soviet Union Survive Until 1984? (New York: Harper & Row, 1970). I must confess that when I read this book 40 years ago, shortly after the Warsaw Pact, or better to say the Soviet Union armies invaded Czechoslovakia, I was afraid this was a very probable and in any case easily conceivable picture of this country after the end of communism. I was afraid of it and I am glad it did not materialize.

I know that the transition from communism to parliamentary democracy and market economy is not an easy task and I know as well that Russia — because of its past, both prior to communism and the longest and the most oppressive and destructive era of communism — was in a very unfavourable starting position.

The search for the adequate transformation concept and the efforts of its implementation had many problems here but we should keep stressing that such a fundamental systemic change is not an exercise in applied economics (or political science) masterminded by enlightened home-grown intellectuals and supervised by unselfish and altruistically self-sacrificing experts from the Western world. It is mostly a spontaneous process run both by self-interest and romantic ideas, only partly checked, directed or influenced by far from powerful politicians. I like late Yegor Gaidar’s saying: «I was only a prime minister of Russia, not a czar of Russia.»

Political leaders and their bureaucracies can make and usually do make huge mistakes and thus contribute to the rise of the transformation costs far above their inevitably non-zero level. These costs were undoubtedly very high here, but we have to take into consideration that such a process is done in a real time. It is not a controlled experiment conducted in a vacuum — without vested interests, pressure groups, political ambitions, etc. The costs of waiting and doing nothing would have been much higher. It became fashionable to criticize the very imperfect legislation as well as its accompanying institutions here (and elsewhere) as if it was possible to stop the spontaneously undergoing processes done by millions of people and to wait years for the exogenously created «perfect» legislation and institutions.

Without attempting to make — with the benefit of hindsight — any strong critical statements about that era, so easy to make, I want to say that already at the beginning — from a distance and as an uninvolved observer — I saw three main problems here which my country more or less succeeded in avoiding:

  • the absence of a widely shared transformation vision which would have given the people the elementary orientation and hope for the future;
  • the lack of macroeconomic and money supply control which led to a very high and hence destabilizing inflation;
  • the inability to set up genuine political parties and, as a result, a full-fledged parliamentary democracy.

Everything else is in my understanding a consequence of these failures. But, once again, I did not come here to give advice, I am sure you have enough well-minded and sufficiently anointed advisors.

I came from the Czech Republic, from a country which wanted freedom and democracy, national sovereignty as well as free markets and I dare say that since the very beginning, we were rapidly moving into that direction, probably more rapidly than any other post-communist country. I am, however, not sure we fully succeeded in creating such a state of affairs. There are several reasons for it but one of them is crucial. As a member of the European Union, we are confronted with an increasing democratic deficit, with serious limitations of our sovereignty, and especially with the inefficient «soziale Marktwirtschaft» which is a very different arrangement than a system of free markets. I do not intend to extensively develop this point here now. I do often and very critically speak about it in Europe where it belongs. It is not my topic for this audience and this country.

The ongoing European development, an almost unnoticed shift from integration to unification, is part of a much broader process which can be characterized as a shift from constructivism at the level of states and later continents to constructivism at the global level under the banner of global governance. The recent setting up of its nucleus in the form of G20 is not a negligible step in that direction. At the EU-Asia summit in Brussels at the beginning of October, I compared this New World Order phenomenon to Aldous Huxley’s Brave New World (which was aptly translated in the communist Czechoslovakia in 1970 as The End of Civilization). I was pleased that your minister of foreign affairs Sergey Lavrov supported my concern about the lack of legitimacy of such institutions.

The G20 was the product of the recent, in our part of the world only very slowly abating financial and economic crisis which came as a surprise for most of the economists, for all the politicians, as well as for most of the public. Almost nobody expected it. The people believed in the omnipotence of central banks and governments to control the macroeconomy and in the feasibility, rationality and productiveness of microeconomic regulation, especially in the financial and banking sectors.

This unjustified and unfounded confidence proved to be wrong. The economists slowly began to understand that the crisis was a consequence of a combination of foreseeable failures. On the macroeconomic side, it becomes more and more accepted that the origin of the crisis was connected with the unprecedented build-up of imbalances in the world economy, with the unusually long period of low real interest rates and of excessive money supply and with the political playing with the mortgages, especially in the United States of America. On the microeconomic side, it became clear that the existing partial and very imperfect regulation did not help. On the contrary, it distorted the rational behavior of banks and other financial institutions and motivated them to look for ways to escape it by means of very dubious «financial innovations».

I consider it necessary to warn against the attempts to once again blame problems in the market as problems of the market. The current crisis was not the result of a market failure or of any inherent deficiency of capitalism. It was a government failure, resulting from the ambitions to insensitively intervene in such a complex system as society and economy. Government actions and interventions caused, prolonged, and dramatically worsened the crisis.

It will sooner or later be over. The long term damage, however, will stay. The adversaries of the market have managed to create a far-reaching mistrust in the system, but this time not only in the free market capitalism, in the laissez-faire system, in the capitalism of Adam Smith, Friedrich von Hayek and Milton Friedman, as it was the case 80 years ago, but in the highly regulated capitalism of the current era. And this is disturbing.

As a small and highly open economy, the Czech Republic could not isolate itself from the visible slowdown of the world economy and particularly from the recession in the countries of our main West European business partners. Our GDP fell by some 4 % in the year 2009. We were lucky that our banking and financial system had not been overexposed to bad loans before the crisis. We also had a big advantage in our own currency. If we were part of the eurozone, the fall would have been bigger.

I don’t have any deep understanding of the current state of the Russian economy. The GDP fall (7.9 %) in 2009 was relatively very deep, twice bigger than in my country. It was probably connected with the decline in oil and gas prices and with the worldwide financial crisis which reduced the access to cheap credits from abroad. The rapid appreciation of the rouble during the last decade (+145 %) played also its role. Nevertheless, the country was much better prepared for the crisis than in 1998 — budget surplus in the years before the crisis, as well as foreign currency reserves due to a strong current account balance position helped.

But I will not speculate about Russia, I will stay at a more general level. For that reason, I will make a heroic simplification and will distinguish only three distinct economic groupings — Europe, America and the so called BRIC countries - and will speculate about their long-term potential.

Looking at Europe, my guess is that the importance of Europe will continue declining. In the past centuries, Europe was helped by its economic system based on free markets, rule of law, property rights, as well as by its political system based on individualism, freedom, democracy, openness and — because of the traditional European nonuniformity — on a very productive system competition.

This ceases to be true. Nowadays, Europeans prefer leisure to performance, security to risk-taking, paternalism to free markets, collectivism (group entitlements) to individualism. All of that is indicated by (or hidden in) the concept of «die soziale Marktwirtschaft.»

It seems that Europeans are not interested in capitalism and free markets and that they do not understand that their today’s behavior undermines the very institutions that made their past success possible. They are eager to very intensively defend their non-economic freedoms, or better to say the easiness, looseness, laxity and permissiveness of modern, or perhaps post-modern European society, but when it comes to their economic freedoms, they are quite indifferent. In many respects, Europe sleeps. Its role will decline. To study its future development will be interesting just for us who live there.

The future of America looks slightly brighter. Liberty is still treasured there, the European «Lethargie» is not yet so deeply rooted there, some elements of dynamism remain. Nevertheless, we also witness important changes in the American culture, in the American values, in the American sense of its future. The seeds of disbelief in the markets, in self-responsibility, in vertical mobility, in individual achievements are there as well. These tendencies are difficult to measure but some of their symptoms are visible. The Obama administration differs from the previous administrations, including the Clinton one. The way the current crisis was dealt with is alarming. The health-care reform and the misuse of the issue of potential climate changes to undercut the markets are similarly dangerous.

The long-term balance of payments deficits, spending and borrowing, as opposed to saving, the belief in new, information or knowledge economy — rather than in free markets — suggest that the U.S.  will have big troubles to retain its contemporary dominance. It is tempting to say that Europe is a forerunner to America. I still do believe, however, there will be more of resistance and less of lethargy there.

The future of the BRIC countries seems to be more optimistic. What is important is that the people in these countries know that success and their personal advancement cannot be achieved without hard work. People in Europe and America hope it can be done by means of technology, education, computers, science, but without working hard. That is a big difference.

There are good reasons to believe in the relatively rapid growth of BRIC-type economies in the long run. Only they themselves can — by wrong policies - undermine their long-term potential. In the short- or medium run their growth may be blocked by burdens imposed upon them by two losing giants, by Europe and America — by their protectionism, by their promotion of the irrational arguments of fair trade, by their accusing BRIC countries of antidumping, by their insisting upon the implementation of labor, health, safety, hygienic and all other standards everywhere — irrespective of the level of economic development, and especially by enforcing upon the less developed countries the most powerful recent anti-market invention — the nonsense of global warming. As I said, I do not want to discuss explicitly Russia. But I include it — optimistically — among the BRIC countries.

The question I asked at the beginning of my speech was — why haven’t I held a speech of this kind in Russia before? The answer to this question can be found in this speech as a whole. Maybe it is only now that the time is ripe for a discussion of this kind. Maybe it is only now that it has turned out that this discussion is missing. And if it is not us who’ll be leading it, it will be someone else.