Death and Resurrection in Prague

March 1 st 1995

Probably the best assessment I have ever heard of the Czech experience under Communism came from a retired post office employee with whom I spoke recently in Prague. He referred to it as "a very dark dream."

And he should know better than most, for he was sentenced in 1953 to two years at hard labour in a uranium mine as part of the spy mania that swept the country.

His case was not an isolated incident. Rather, millions of such injustices—some bigger, some smaller—resulted from this vast social and economic experiment gone very wrong. And by the time it was over, Czechoslovakia was split in two, millions had fled, and the country was economically and spiritually exhausted.

Actually, the destruction of the Czech economy was far from easy, given its robust state at the time of the coup in 1948.

Under normal conditions, Czechoslovakia could have recovered fully from the war within a few years. Unfortunately, life was far from normal and the coup instead led to a series of initiatives that devastated the country.

Economic consequences

Upon taking power, the new regime moved to create a command economy run largely on Stalinist principles. As part of this, it nationalized most private property, collectivized agriculture, encouraged heavy industry—including arms production—and linked the economy with that of the Soviet Union.

A key element in socialist "reconstruction" was massive nationalization and, while this was an aspect of all East European economies, its application in Czechoslovakia was more extreme. It quickly demotivated the workforce, gutted the management cadre, and suppressed real prices—which was especially serious since it led to the misallocation of scarce capital and resources.

And compounding these distortions was the detailed oversight of the entire economy—including hiring and promotion, and the entire trade union structure—by the Communist Party.

A second shift in emphasis saw the encouragement of energy-intensive, heavy industries, which led to the devastation of large tracts of Central European forests since the only naturally occurring energy resource was brown coal.

The remedies employed were almost worse than the disease: heavy investment in Russian nuclear reactors, and a massive hydro-electric dam in Slovakia which threatens to damage the Danube River aquifer and agriculture in Hungary and Slovakia.

A third strategic shift—linking the economy with that of the Soviet Union—was also problematic.

To begin with, the military industries which resulted languished with the end of the Cold War and showed few prospects for reconversion to nonmilitary uses.

Then again, nonmilitary exports to the Soviet Union also led to problems since many Czech enterprises found that they could sell everything they produced—no matter how shoddy—to the huge and largely unsophisticated Soviet consumer market. And so they became complacent, paid scant attention to style and quality, and became increasingly obsolete and uncompetitive.

A fourth policy saw a shift from investment in technology, industrial assets, and infrastructure to increased spending on current consumption, the military, and social programs. While these new priorities enhanced the regime's power and its standing with the public, they also damaged the industrial competitiveness of many Czech enterprises—which was to prove disastrous once they were forced to compete in the world market.

Social consequences

The social, psychological, and moral consequences were equally serious.

First of all, there is a huge burden of guilt which must be shouldered by the many former members of the Communist Party.

Certain negative ways of thinking and behaving have become ingrained and often impede the ability of people to appropriately respond to this new world in which they find themselves.

These are a sort of psychic scar tissue leftover from the struggle to survive and cope with a paternalistic, authoritarian, and highly unpredictable totalitarian system.

Of course, everyone had his or her own way of coping with such unpredictable and arbitrary power. Some became passive, resigned, or dependent. Others went into "internal exile" and preoccupied themselves with their private lives. Yet others split themselves as they parroted obvious lies in public while speaking the truth privately to friends and family. A general cynicism resulted from the gulf that separated official pronouncements and the reality of daily life.

Finally, the Czech people have missed four-and-a-half decades of human experience. While this is sad at the individual level, it is tragic at the national level since it has damaged the human capital of the Czech Republic and hence its ability to compete and prosper for years to come.

Transformation under way

The euphoria of the "Velvet Revolution" was soon replaced by harsh reality as crisis after crisis faced the new government.

Economic liberalization, begun in 1991, was hampered by the disruption of markets in Eastern Europe and the former Soviet Union, the Gulf War, and the resulting recession in the West. As well, demand shrank as the government and state-owned enterprises trimmed their spending and the purchasing power of the population plummeted. Finally, privatization and the collapse of the command economy disrupted wholesale and retail networks and so impeded the production and sale of consumer goods.

As a result, Czechoslovak industry experienced a 20 per cent drop in output in 1991 and the Czech GDP declined by 14 per cent in the same year—with another seven per cent drop in 1992. GDP growth would not begin to recover until 1994.

At the same time that Czech industries were fighting to survive, Czech citizens were struggling too. The subsidies and price controls which had kept prices unnaturally low for so long were removed and prices allowed to rise. Inflation ran at 11 per cent in 1992 and skyrocketed to 19 per cent in 1993. Estimates suggest rates of inflation of nine per cent in 1994 and six per cent for 1995.

These economic woes were complicated by delicate political situations which threatened the continued existence of the nation. The most vexing of these led to the secession of Slovakia in 1993.

Still, many of these problems have now been addressed successfully, thanks in large measure to policies that have avoided both the excesses of the "shock therapy" approach used in Poland and the inaction and corruption seen in Russia and Ukraine.

One policy seeks to insulate citizens from the worst aspects of liberalization—dramatic price increases and massive unemployment. Thus, rent controls remain in place, over-staffing continues in the workplace, and many of the most difficult privatizations have been left to the last. In this regard, it is interesting to note that during the most difficult phase of liberalization, 1992 to 1994, the unemployment rate rose only from 2.6 per cent to 3.1 per cent.

A second policy seeks to maintain support for liberalization by allowing ordinary citizens to benefit from the privatization of government enterprises.

For instance, the first wave of privatizations included enterprises such as restaurants and small shops, which were in large measure bought by those who had worked in them.

As well, the government provided Czech citizens with vouchers which could be sold or used to buy stock in privatized enterprises.

A third policy seeks simply to provide good government and stability for the country.

And here again, the new government—while not free of scandals or controversies—has been remarkably successful.

A clear indication of this can be seen from the fact that the economy is recovering, living standards are improving, and the value of the currency is appreciating. Perhaps most impressive of all, there was a small budget surplus last year!

Problems ahead

Nevertheless, problems do remain.

On the economic level, some of the heaviest lifting still remains.

For instance, many enterprises remain to be privatized—and these are the hard ones!

As well, Czech industry must become more productive. But this is easier said than done, since it will mean a reduction in staffing levels, reform of education and training, the encouragement of foreign investment and technology transfer, the modernization of Czech industry, and a major overhaul of commercial and tax legislation. In some cases, this may require the creation of new institutions.

At the same time, the Czech Republic will have to redesign its social and health care programs to better address the needs of its citizens as unemployment increases and Czech society begins to suffer from drug abuse, family breakdown, and general moral and social decay, which seem to accompany membership in the West.

Indeed, there are signs that these are on their way. One example involves drugs—not a big feature of Czech life until now. Thanks to the efforts of the Russian, Chechen, and Balkan mafias, drugs are now beginning to penetrate Czech society.

Another example is workaholism, an increasingly serious social problem which is having a very negative impact upon many Czech families.

Finally, the Czech people have lost valuable time in a world that is unforgiving of those who fall behind, and it is not clear that they will be able to catch up.

Lessons for Canada

The collapse of Communism represents a remarkable irony. Those living in the former "socialist paradise" want nothing more to do with ideology while many in the West seem increasingly prepared to restrict political and economic freedom in the name of "political correctness."

Perhaps most remarkable of all is the patience shown toward the excesses of this movement, no doubt based on a belief that the pendulum will return once again to the centre and little real harm will result.

In this regard, it is probably well for Canadians to reflect on the fate of the Czech people—people every bit as well educated and cultured as themselves—who have discovered that the damage resulting from social engineering can be more difficult to repair than anyone had heretofore imagined.


Paul Malvern is an Ottawa-based consultant.