The success of economic reform in the Czech Republic is also notable — as is the contrast with Slovakia, which has deliberately retained a more socialist orientation. The Czechs, of course, inherited a tradition of industrial success which not even forty years of communism could extinguish. Before the Second World War Czechoslovakia was one of the world’s most advanced economies with an income per head equal to France. Moreover, the Czech reformers, unlike their Polish equivalents, did not inherit hyperinflation; nor were they inhibited by the necessity to seek communist support for the reform measures. Under the determined leadership of Vaclav Klaus, first as Finance Minister and since as Prime Minister, a radical strategy was adopted with no concessions made to demands for a ‘third way’ between capitalism and socialism. Price controls were removed, subsidies cut back, public spending sharply reduced and the currency made convertible for trade purposes. A pioneering scheme of mass privatization through vouchers has transformed the pattern of ownership, with 80 per cent of Czech assets now in private hands. After the traumas of change, economic growth (at 2.5 per cent in 1994) has begun on a sound footing and, in spite of the shake-out of labour from old inefficient industries, unemployment (at 4 per cent in 1994) is low. Unlike in Poland and Hungary, those who pushed through the necessary economic reforms have in the Czech Republic also reaped the political rewards — which itself is the best guarantee that those reforms will continue.
Yet it is perhaps the example of the smallest and poorest of the former Eastern bloc countries, Albania, which best illustrates the creative potential of uninhibited capitalism. Indeed, what has happened since the fall of communism gives a quite new understanding of Schumpeter’s description of capitalism as a process of ‘creative destruction’. Albania had lived in a time warp, cut off from political or economic contact with the outside world, without decent communications, burdened by hopelessly outdated industries, its agriculture totally collectivized, the landscape dotted with bunkers built by its paranoid rulers. The only way forward was to start again from scratch; and this is what happened. A sudden huge emigration, though presenting immediate problems for Albania’s neighbours, has since resulted in a substantial inflow of remittances which, with overseas aid, allowed the beginnings of a consumer society. Small businesses mushroomed everywhere. Everything which could be salvaged from the collective farms and the bunkers was dismantled and used in new private farms which sprung up and which — the government having abolished price controls — were soon able to feed the population. Albania is now achieving what almost everyone considered impossible: its economic growth has been in double digits for two years running — though, of course, from a very low level. Foreign investment is taking advantage of low wage costs, lack of regulation and the country’s mineral wealth and potential for tourism.
The different rates of economic progress, therefore, in the former communist states bears out my central thesis — namely that although political, social and cultural factors are not without importance, the free-enterprise formula works whenever and wherever it is applied. Moreover, its application is crucial to the entrenchment of democracy too. As a recent survey of public opinion in ten ex-communist countries shows, in nearly every case nostalgia for the old communist regime is associated with failure to make a rapid transition to a free economy.[122]
TWO MODELS — THE UNITED STATES AND GERMANY
The economic reformers of Central and Eastern Europe naturally sought to study the most successful models of the capitalist system which they intended to recreate. Many of them looked to Britain, particularly in order to learn techniques of privatization, though these have had to be adapted to different circumstances. But it was the examples of the United States and Germany which have had most influence.
There are significant differences between the American and European versions of capitalism. The American traditionally emphasizes the need for limited government, light regulation, low taxes and maximum labour-market flexibility. Its success has been shown above all in the ability to create new jobs, in which it is consistently more successful than Europe. Since the 1960s employment has grown on average by only 0.3 per cent a year in the EEC, compared with 1.8 per cent a year in the USA; moreover, in the US, by contrast with Europe, most of the jobs were created in the private sector. Over 40 per cent of the unemployed in the EC have been out of work for over a year, compared with 10 per cent in the USA.
The European model — in particular the German version — has, however, recently attracted much sympathetic consideration by policy-makers in the American administration who favour an interventionist approach to training, industrial policy and managed trade. It is, therefore, particularly important to understand the weaknesses as well as the undoubted strengths of the European system as exemplified by Germany. For if the world’s greatest example and exponent of liberal capitalism were to turn away from it in either internal or external economic policies that would have momentous implications for the free-enterprise system generally.
West Germany’s emergence as the major European economic power in the post-war years was rightly described as an ‘economic miracle’. A combination of very low inflation and high productivity characterizes the German success. This reflects both the character of the German people and the policies pursued by the German government, particularly in the 1950s and 1960s when the emphasis of the ‘social market’ approach was on ‘market’ rather than ‘social’. The 1970s and 1980s saw something of a reversal in that balance with a growth of state intervention and joint decision-making (Mitbestimmung) by unions and management. There was also a large increase in the tax and regulatory burdens on employers which, it has been suggested, now approach 100 per cent of wages. Although the German economic performance has been impressively consistent, under both these burdens and the shock of a not very well managed enlargement to take in the ex-communist East, some of the characteristics of German capitalism which made for past successes are already leading to serious problems — problems that threaten to get worse. Industrial consensus has degenerated into a more rigid corporatism, which reduces the ability of German industry to adapt flexibly to challenges from Asia and Central Europe. This applies both at the level of individual German companies and in sectors. Significantly, German employers agreed to raise East German wages to West German levels by 1994, which attempt proved deeply damaging — and ultimately practically impossible. But such a decision was only possible in an economy where centralization of wage bargaining was the accepted norm.
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This survey, part of the study