Jan Svejnar - US-based, Czech-born economist on experiences abroad and challenges facing the Czech Rep

Jan Svejnar is one of the most respected economists the Czech Republic has produced. An adviser to former president Vaclav Havel, Mr Svejnar is a professor at the University of Michigan's business school and heads an American-style PhD programme and research centre at Prague's Charles University. I caught up with the economist recently in Prague to discuss both present and past events, including how Jan Svejnar left Czechoslovakia two years after the Soviet invasion of 1968. He was just 17 at the time, just shy of his high school diploma.

"That's an interesting story. I left just before my finals at highs school, smuggling all my transcripts. I was a pretty good student so I applied to a number of European universities to see if I could enrol and they all responded saying 'we fully understand but there is nothing we can do - without a high school diploma we can't enrol you'.

So, I tried US universities, I ran into three professors at the time, one was from Duke, another from Cornell, the third was from Michigan State. And, they wrote letters of recommendation for me and Cornell and Duke responded, saying why don't you come as a special student for a year, and if you can handle the material we'll transfer you into a regular student programme. I decided to go to Cornell and that August I had my suitcase, my guitar, my skis, and I headed to New York City and then to upstate New York."

You were sure to take your skis with you...

"Yes! I was actually an avid skier and back in Czechoslovakia I had been on the junior ski team. We went racing every weekend in the Giant Mountains or other mountains also in Slovakia, so I was hoping to continue. As it turned out I was very fortunate because I made the Cornell ski team, which introduced me to a tight-knit group of close friends with whom we went skiing in upstate New York and Vermont. So, yeah, it was fortuitous and it was good."

What area of economics grabbed your attention?

"It's interesting but by pure chance I was admitted by a special school at Cornell called the School of Industrial and Labour Relations, a school that dealt a lot with labour economics, labour issues, and so on. So, my first love in economics, my first field that I started working in were issues related to labour from the standpoint of the firm, the enterprise, the corporation, how workers and management interacted - industrial labour relations as a field. I also started being interested very early on in comparative studies, economic development in the poorer countries."

OECD

What were some decisions that you were able to witness or take part in pre-1989 that had a profound effect?

"I started working with the World Bank quite a lot and some other financial institutions, organisations like the Organisation for Economic Co-operation and Development (OECD) in developing countries. Where I, or the teams that I usually worked with, had the opportunity to advise governments, as well as non-profit institutions and the private sector, but usually governments, in terms of policy. We were able, for instance, in the French-speaking African countries such as Senegal, to help alter the labour code in order to make the economy more flexible and be able to increase the hiring of workers and expansion of firms, in terms of output or employment.

In the 1980s, I also started working quite a lot in Yugoslavia: a country that one could work in, get information, get data, and carry out analyses. The Yugoslav government was very much interested at that point over how to spur economic growth and so I could start learning about how a quasi-communist system - government policies, firms, & workers interacted. That helped me after, of course, the fall of the Berlin Wall, to be able to be helpful in the context of the transition economies."

You were 37 when the Wall fell. How were you struck by the events, first as a Czech, second as an economist?

Berlin Wall

"Both were striking! I did not really think that in my life time communism would be overthrown. True, some people had been predicting it for decades but predictions that are decades old are not very useful. You need to know that it's going to happen next year or the year after {laughs}, something like that. So that was of course a phenomenal change.

As an economist it was both an incredible opportunity to learn about changes in the system, and in fact an opportunity to 'influence the outcome'. And, between November and the end of December 1989 I wrote a blueprint for economic transformation for Czechoslovakia, which I then brought here in January and circulated widely and talked about with government officials. In various ways it had an impact on the transformation here and some of the other economies as well."

What were some of the points that you stressed?

"Well, I stressed and overall point that one really needed to prepare really well the ground on which one built. So, I was stressing the importance of preparing the legal and institutional framework which would be compatible, enabling, and consistent with a free-market economy. My argument - which at that time seemed paradoxical - was 'hold the system for a moment, prepare the ground, and then go forward quickly with a set of well-defined, coordinated, and highly complementary reforms' so that you change the economy quickly but already within a legal and institutional framework that can support it. I had a fear that if you just introduced a 'half-breed' half system, that one would be worse off than being at either extreme.

In that strategy paper I named and described all sorts of reforms from liberalising prices to carrying out privatisation, arguing for macroeconomic stabilisation, or for the creation of trade unions - necessary (but that there should be company-specific bargaining as one sees in the US or Canada, rather than industry-wide). I was worried, and I think correctly, that weaker firms might not survive if there was just a single wage introduced across the entire industry and yet we wanted to keep maximum employment, because one of the problems as it emerged subsequently was a high unemployment rate in virtually all these economies."

Speaking of the legal framework, you were - and you remain - critical of the legal system today...

"Exactly. My unhappiness stems from the fact that the government I think underestimated, or that people did not want to create, a very strong legal system and enforcement. There was a very rapid privatisation which I thought was fine although I was against the majority stakes as they were given, because corporate governance then suffered: at companies there were for a while no strong shareholders who would really determine where the companies were going and that's what led - together with the weak legal system - to the looting, the 'tunnelling' as it was called. Where managers, or workers or groups of individuals could essentially siphon-off either assets or profits from firms and it made sense for them because they didn't own the firm as a whole, or they owned it in such a way that they worried someone else might take it from them, so it was preferable to get 'quick' money by looting rather than restructuring and creating value in the medium and long-run."

Even now, there are still outstanding issues waiting to be resolved: notably pension, health, and education sector reforms. Do you think after elections next year the new government, regardless who wins, will finally find the means of doing something along those last steps?

"That's a good question: I am not absolutely sure about it because I am not sure which way the elections could turn out. There is a window of opportunity in the sense that the new government can take important steps. It will be a question of political will and the constellation of political power. If we get a situation, such as we've just seen in Germany, where there is almost a balance or an impasse in terms of political outcome, then it's much harder to carry out strong reforms.

But, I think that all the politicians now are acutely aware that there is a pension issue, that the system is essentially too expensive and not means-tested, doesn't address the real problems of people who need assistance. The same goes for health care: it's a system which is very broad, very inefficient; people waste health care resources and so on. Again, it doesn't really help in an acute way people who really need major surgeries and so on, at least not as efficiently as it could.

In the education system even more with globalisation we are realising that schools and research & development are really not at the world-class level. A country that has no natural resources and is an open economy integrated into the world trading system needs to have a strong human capital base on which to build. So I think there is an awareness that changes need to be made, and those are really the big challenges that need to be addressed."