Czechoslovak privatisation hits snags

May 15, 1991

By Adam Novak

and Peter Annear

PRAGUE — The reality of Czechoslovakia's privatisation program is proving quite different to the rosy picture painted in the early days of the "Velvet Revolution". Nor is the reform process the uncontrolled rush to the market which the neo-liberal proclamations of finance minister Vaclav Klaus and his supporters suggest; the advance towards capitalist economy is much slower, more cautious and more complex.

While it swept away the old Communist Party leadership, the mass democratic movement of 18 months ago did not remove the ubiquitous bureaucratic apparatus that supported it. Rather, it forced the bureaucracy only to share power with the new political leadership of the popular movement for democracy.

This new ruling coalition sees no alternative but closer integration into the capitalist would economy while the Soviet Union, Czechoslovakia's largest trading partner, is experiencing a severe economic collapse.

The new political leadership, represented by President Vaclav Havel, wants to carry through the reforms while avoiding social revolt. Within the apparatus, many see the opportunity to become the managerial and small capitalist classes in a system dominated by foreign capital.

The economic transformation is being carried through by:

  • The introduction of private property and market structures in retail, services and agriculture.

  • The privatisation of most large state enterprises.

  • The introduction of a labour market.

  • The development of indirect market instruments in relations between enterprises, while reserving overall state control of the economy.

Sales stalled

Price controls and enterprise subsidies have been removed or relaxed, producer prices increased by 20%, credit and financial policy given greater importance and the scope of direct decision making by sectoral ministries reduced as part of freeing relations between enterprises. But the privatisation process is stalled.

The so-called small privatisation is leading only very slowly to the formation of a new middle-class layer of self-employed, the government's main aim in the first stage of the reform.

In fact, the eventual owners of much of what is now for sale will be foreign speculators. Opinion polls show that public interest in auctions of government-owned small business is dropping rapidly. ulation wanted to take part in the auctions in January, now only 18% intend to do so, 2% as possible owners and 16% as speculators.

In April, parliament rejected draft legislation on land ownership and use, which attracted 28 conflicting and still unresolved amendments. The government's moderate plan for the break-up of the collective farms has been challenged from the right, essentially by the 3T group of deputies (named after the initials of its three leaders) who want restitution to former landowners. Even the 1920s land reform is regarded as "communist" by 3T.

Agriculture

The government proposed to divide collective farm property among original members of the collectives, leaving about half the current members without any rights. It aimed to create an agricultural middle class of private farmers, to achieve the concentration of land and to reduce the rural population without accepting responsibility for the consequent social transformation. But the legislation threatens the collapse of the relatively efficient agricultural industry.

Angry farmers and the left have accused the government of an "ideological campaign against the collectives" based on its opposition in principle to collective property. This is only partly correct, however; the government also has political aims.

Agriculture is relatively successful but not profitable, according to agriculture ministry researchers, because most of the value added comes in the processing stage. Before World War II, food processing was dominated by the farmers' cooperative company, Kolektiva, one of the most profitable enterprises in the inter-war period.

Now, as many mills and bakeries are reclaimed from the state by their original, cooperative owners, the government fears its plans will be threatened by the extension of collectives into the small space reserved for the creation of a domestic middle class.

Agricultural economist and Left Alternative member Yiri Vrany told Green Left Weekly, "Democratised and freed from state control, agriculture would be able to compete with Bavarian agriculture, for example, assuming of course the same kinds of government subsidies.

"In any case, the key is the linkage between the primary producers and the processing enterprises. The government wants this to be in private hands, but it can't support 3T-type demands for restitution of land to private owners, which would turn over relatively efficient property to old people unable to run it."

Government 'paralysed'

Vrany says that foreign investors "are interested in only a few enterprises, like the Budvar Brewery in Ceske Budejovice [in German, Budweis]. The American Budweiser beer makers want to buy the enterprise, not to operate it, but to gain the trade mark and therefore the right to sell their own product worldwide.

"Petr Uhl [a prominent left-wing member of parliament] told me he ill be passed eventually, but he says it won't be as anti-collective as the original government proposal nor those like the 3T proposals because of the strong movement of collective farmers defending their own rights.

"The government does not want a new type of Kolektiva; that's why it is paralysed."

Restitution legislation, which affects 25% of state property, is regarded by President Vaclav Havel as evidence of Czechoslovakia's central European culture and civilisation. But most other post-Stalinist European governments have rejected similar measures as impossibly complicated.

The cost of administering claims may approach the value of the enterprises to be returned. The new owners are unlikely to have sufficient capital to manage the properties, which many plan to sell or rent. And restitution is seriously slowing the privatisation process because nearly all enterprises include land, or buildings constructed before 1948, over which someone may now have ownership rights.

Restitution may contribute more to the creation of a new entrepreneurial middle class than small privatisation, though much auctioned and returned property will quickly fall to banks and foreign buyers.

More than 40% of registered "entrepreneurs" work for themselves as a second, part-time job alongside employment in the state sector. In many cases, state-regulated prices can cripple their private businesses.

A survey of small-business start-up costs in the business paper Profit revealed that cake shops and cafes need an average 10,000 crowns in capital while food shops need five times that and hardware shops nearly 10 times as much. This is well beyond most Czechoslovak small entrepreneurs.

Joint stock companies

Until November 1, enterprise managers may conceive their own privatisation plans. After this, enterprise ownership will be transferred to one of the Funds of National Property, administered by the all-powerful Ministry for National Property and its Privatisation, and the enterprises transformed into joint stock companies for sale a few at a time.

To avoid a fire sale, and following advice from experts in Thatcher's British privatisations, the most profitable enterprises will be sold first, and the rest slowly over time. Foreign capital is to be actively sought.

Under a coupon scheme, citizens will have the right to buy 2000 crowns' worth of shares in privatised enterprises at half price. This legacy of Civic Forum's early economic policy is unpopular with key economic reformers like finance minister Vaclav Klaus, who consider it a potential economic disaster.

To avoid dissipation of ownership, capital shortages and resulting are later cashed, the coupons have been limited to 40% of an enterprise's shares, are non-transferable, cannot be traded and provide for no role in management. The object is to create only a feeling of ownership and soak up excess savings while allowing foreign investors a stake corresponding to their financial investment and management role.

Every second worker now believes their own enterprise has no future, according to a survey published in the March 28 Profit. One in 20 anticipate their enterprise will soon be bankrupt; only 7% will definitely buy shares in their own enterprise.

Most likely, the "large privatisation" will incorporate half of existing state property, but could take 20 years to complete. A quarter of state property will be affected by "small privatisation" and "restitution". The remainder — public utilities like water management and public transport, which cannot be sold or liquidated — will remain in state hands. Recognising that capitalist countries, like nearby Austria, maintain 30% state ownership, the whole program seems overly ambitious.

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