Vladimír Dlouhý: Low growth key obstacle to government's reform plans

Vladimír Dlouhý

What will Germany’s decision to phase out nuclear power mean for the Czech Republic? Can the Czech government implement far-reaching reforms without credibly tackling corruption? And is the country’s fiscal strategy too ambitious? These are some of the issues we discuss with Vladimír Dlouhý, our guest in this edition of One on One. Mr Dlouhý, a member of the Czech government’s advisory board NERV and a consultant for the investment firm Goldman and Sachs, served as the country’s industry and trade minister between 1989 and 1997.

Vladimír Dlouhý
In that position, Vladimír Dlouhý spearheaded the controversial decision to complete second Czech nuclear plant. Some two decades later, he still believes that for the Czech Republic, nuclear power is the way to go, and says the German’s government decision was wrong.

“As a Czech, as somebody was responsible for re-launching the construction of the nuclear power plant in Temelín, and as a person, I’m very strongly convinced this was not the right decision. I would even say the prevents humanity, or at least the European people, from using a source of energy which indeed is not easy to use but at the same time provides environmentally-friendly, economically efficient and also generally very clean and I’d say neat source of energy.

“It of course requires a lot of effort – engineering, construction, scientific, regulatory, financial, legal, even environmental – but I still believe that all this effort would a price worth paying for the continuation of nuclear energy. So I’m sorry to see such a decision. But when we say that each country has the right to decide what its energy mix will be, we in the Czech Republic believe we have the right to continue.”

Why does the Czech Republic embrace nuclear power? It seems we didn‘t need Temelín as we export a large share of what it produces. It also seems that we won’t need the planned two new reactors there as the Czech Republic is one of Europe’s most energy-intensive countries. Why is nuclear power the right solution?

“Well, we are talking in early June, 2011 when due to the financial and economic crisis, the overall economic output slowed down and the forecast is also much less ambitious than five years ago. But you should not forget the same debate between 2006 and 2008 when the forecasts were completely different.

“At that time, the debate did not only involve the total capacity of power generation in our country but also the proper structure of the energy mix, environmental issues, and so on. If we say no to nuclear power, then we must immediately answer the question, what the substitute will be. We burn a lot of lignite to produce electricity which entails very strong environmental consequences – the debate about opening new lignite mines met with protests.

“What I’m saying is that it’s not so clear that the Czech installed capacity is sufficient. Maybe it is – we export power and we will be. Look at what the German government’s decision did with the share prices of ČEZ, the country’s main energy utility. But the debate is also about the structure of what we produce, and about the society’s attitude to modern technologies.”

The planned construction of two new blocks at Temelín will have serious political and security implications. We import nuclear fuel from Russia and if the contract is awarded to a Russian state-owned company, out dependency on that country will only increase. Won’t this compromise our energy security?

“I’m very sensitive about keeping the Czech Republic independent, or preventing it from becoming a hostage of foreign energy sources suppliers. This applies to Russia but it also applies to all other potential sources. However, if we don’t go ahead with nuclear energy, then the remaining source is gas. And who is and can be the main source of gas supplies? The bulk of the gas will again come from Russia. So your question is generally right but it’s not entirely proper when discussing the internal energy mix given our limitations.

“But there is another question. Given the economic slowdown which I believe will continue for a whole decade, maybe the construction of blocks three and four at Temelín will be postponed to the second half of this decade. But it’s only my personal intuition.”

Given the current state of Czech politics, the way political parties trade with influence and the way corruption has grown into them: do you trust the Czech government to make the right decision bearing in mind the country’s interests rather than being prone to lobbyists?

Photo: Barbora Kmentová
“I’m definitely fed up with the level of corruption in this country. I’m fed up with the way political parties, in the government and outside it, are intertwined with vested interest groups. But this is the foreign broadcast of the Czech Republic, and we should represent our country in a proper way. Let me tell you that corruption and vested interests especially concerning large energy projects are behind the decisions of many governments. Such decisions never involve governments alone; they also involve very powerful energy firms, construction lobbies, and so on.

“It always depends on a particular country, a particular society. And here I trust the Czech establishment to make the decision in a proper way. I personally believe that if transparency is maintained, the Russian company will not be selected. Not because it’s Russian but because it won’t be competitive. But again, this is my intuition, nothing else.”

Speaking of transparency: when you left politics in 1997, the Czech Republic ranked 27th on Transparency International’s Corruption Perception Index. Last year, we ranked 53rd. Why do you that is, given the fact that the post-communist region of the 1990s was considered very corrupt?

“I left after massive privatization took place in which some projects were done well while others less so. Everybody who was in the government at that time faced corruption accusations – I can tell you stories about that. But at the same time, I believe that the Czech government and some other governments in the region, with some notable exceptions – allow me not to name them – were genuine in their efforts to transform their economies from communist central planning to market economies.

“With time, when countries and their economic systems matured, the ownership structures with different vested interests groups became too interlinked with politics. Look at Poland five or seven years ago, look at Hungary two years ago, at Slovakia three or four years ago, Romania, Bulgaria: there are very strong complaints about corruption.

“Yes, I admit that in central and Eastern Europe, the level of corruption is above a certain standard. But I tend to believe this is a kind of wave that will diminish again, and we will get to some standard interaction between powerful private sector groups and political parties.

Photo: Štěpánka Budková
“One more remark, again because this is a foreign broadcast: there is a feeling in some countries that corruption can be cured from outside. There might be some help but the bulk of the work must be done at home.”

Do you think that the government can successfully implement its planned reforms with far-reaching consequences – the fiscal, pension and health care reforms – without credibly tackling corruption?

“Some of them yes, others on. You seem to be obsessed with corruption in this country, and I’m saying I’m indeed fed up with it. But it’s not the only feature describing the Czech Republic today. Corruption is a problem in many European countries, and to some extent, those individuals representative of corrupt interests are simply more stupid than their counterparts elsewhere because corruption there is much more hidden. But yes, let me repeat for the third time, it has reached levels in the Czech Republic that have become impossible to maintain, and we must do something about it internally.”

I was pointing more to the fact that in the 1990s, when you were one of the leading figures in the Czech economic transformation, people were much more willing to accept those reforms despite the fact that their standard of living decreased. But now it seems increasingly difficult for the government to justify some of the unpopular reforms when people see how corrupt politics can be.

“That’s something different. The French have a very nice expression, reform fatigue, meaning people are tired of reforms. And this is exactly what happened here. You are centred around your obsession with corruption but foreign politicians and markets consider the Czech Republic to be small, relatively well-managed – listen, you wouldn’t believe it – with deficits and debts under control, with relatively strong manufacturing industry that enjoys external demands from Germany, and a country with relatively educated and skilled labour force and relatively good infrastructure. So the Czech Republic is boring.

“But there is one internal problem. We won’t probably suffer form a Greek-type crisis but we have a very low growth, between two and three percent. Here is what you were saying: given the low growth and the huge differences between the standard of living in cities and the countryside, people in those regions don’t see any future. Everybody there has some standards; they have welfare if they lose their jobs, they can afford their housing, food, cheap holidays, mobile phones, and so on – but nothing else. If you have low growth, corruption and differences among various regions, people will sooner or later become fed up with the situation. That is I believe the main problem of the Czech Republic in the medium and long-term: low growth with unsatisfied people.”

Would say then that the fiscal goals of the current government – deficit of 3.5 percent per GDP in 2012 and balanced public finances by the year 2016 – is too ambitious? Should they focus more on pro-growth measures?

“This is one of the crucial questions of today’s economic policy. I was always quite hawkish so a year ago, I would probably say yes. Today, I’m so sure. What Finance Minister Miroslav Kalousek says is very true: what he isn’t able to push through within the first 18 months of the government’s term, he won’t do at all. This is something I understand. The finance minister also sent out a very strong signal to foreign markets that now understand that despite all the internal problems, the Czech Republic has a government that’s embarked on a very strong fiscal policy, not allowing the country to slip into the debt and deficit traps.

“On the other hand, the question is how to proceed after 2012. Should we embark on the 3 percent of GDP/deficit ratio, or should we try to seek a ratio that will always be perceived by markets and debtors as sustainable? That’s something else. Why exactly 3 percent? It could be more. The point is that I don’t believe in very much fiscal stimulation; their value in this country is close to one. I rather believe that we should try to finance enough projects that will over the long run improve the productivity and efficiency of our economy.”