By Josef Sima/Marian Tupy
The Czech Republic once was known as Central Europe’s leading reformer. The center-right government of Vaclav Klaus, now the country’s president, began economic liberalization. That process continued under the leadership of his Social Democratic successor Milos Zeman. Those days, however, are long gone. Though economic growth is still relatively high, the Czech economy increasingly resembles „old“ Europe. On June 2, the Czechs will elect a new government. They must decide between further liberalization and eurosclerosis.
In the early 1990s, the Czechs led the way among the post-communist countries with an ambitious reform agenda that included „voucher privatization“ through which millions of Czech citizens became shareholders in the economy. The government got rid of thousands of orders and bans, allowed Czech and foreign citizens to enter the market, liberalized prices and foreign trade, and privatized many state enterprises. The private sector, nonexistent under communism, emerged during the 1990s and transformed the country into a popular destination for tourists as well as small and big businesses.
The socialists, who came to power in 1997, continued privatizing. For example, major banks, which were not privatized during the initial reforms and accumulated huge debts, had to be bailed out and sold to foreign investors. The telecommunications monopoly was also privatized. According to the Fraser Institute’s Economic Freedom of the World 2005 annual report, Czechs moved from complete state control of the economy in 1989 to 44th freest economy in 2003. Despite years of socialist rule, the Czech Republic continues to be the third-freest economy in the former Soviet bloc (after Estonia and Hungary).
Unfortunately, the state’s role in the economy is growing once again. The overall government spending as a percentage of gross domestic product is 43 percent (compared to 36 percent in the U.S.). There is a strong desire on the center-left to create a standard European welfare-state by emulating the disastrous social and economic policies in some countries on the European Continent — primarily France and Germany. That desire was further strengthened by the Czech membership of the European Union and its heavy emphasis on economic regulation and income redistribution.
As a result, the Czech economy has began to suffer from „old“ Europe’s ailments, including growing public debt, bankrupted social security system, wasteful public services, and, most importantly, unemployment of more than 8 percent. Those are issues the coming election must address.
The challenges facing the market-friendly center-right opposition are substantial. The expansion of government handouts over the last few years has created a large voting bloc beholden to the socialists. Consequently, free-market solutions to the Czech economic problems — such as creating incentives to tackle waste in public services –that could include some student fees and patient co-payments, are politically radioactive.
The socialists use slogans such as „We want free health care, and you?“ to scare potential voters away from the opposition. They also use fake opposition billboards stating „We are in favor of paid education“ and „We want to abolish the minimum wage,“ suggesting such proposals are so obviously absurd everyone should vote for the socialists. The opposition proposal to introduce a flat income tax — a popular measure in other post-communist countries — is ridiculed by a billboard picturing an imprisoned Czech businessman. The billboard reads, „Yes, I am in favor of a flat tax, too.“
The socialist election strategy demonstrates the extent to which the Czech Republic has become a „standard“ EU country, but that is exactly what the Czechs don’t need. Instead, the Czechs need fast economic growth that would reduce the income gap caused by 40 years of stagnation behind the Iron Curtain. There is much to be done in „desocializing“ the schools, health care and pensions. Much can be done in reducing taxes and the bureaucratic burden on the economy. The threat of high long-term unemployment that plagues France and Germany should serve as a warning.
Instead, the current government wants to solve high unemployment by implementing a stricter labor code, which the socialists rammed through Parliament with the support of the largely unreformed Communist Party.
Common sense and the political cycle appear to be on the side of the opposition. Will it be enough to stop creeping socialism? Or, will the Czech voters jeopardize both their future economic prosperity and the prospects for reform in the EU as a whole?
Josef Sima is an economic policy lecturer at the University of Economics in Prague, the Czech Republic, and Marian Tupy is assistant director of the Project on Global Economic Liberty at the Cato Institute.
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