The Rise and Fall of Czech Capitalism
The book on voucher privatisation, bank ownership and the tunnelling that followed.
Summary
Martin Myant, an economist specialising in Central European transition, examines the Czech economic transformation from 1989 through the currency crisis of 1997 and its aftermath.
The Czech case was widely presented in the early 1990s as the transition's success story: rapid voucher privatisation, low unemployment, low inflation and a stable currency. Myant explains why that assessment was wrong. Voucher privatisation distributed shares to citizens who sold them to investment funds, most of which were owned by the state-controlled banks. The banks therefore ended up as the dominant owners of the enterprises to which they were also the principal lenders, which removed any incentive to enforce credit discipline. Enterprises continued borrowing against assets they were not restructuring, and the banks accumulated bad loans that were not recognised.
He also documents tunelovani, the practice of asset stripping in which fund managers and enterprise directors transferred value out of the companies they controlled into vehicles they owned personally, which the legal framework did not prevent. The 1997 currency crisis and the subsequent recession exposed the accumulated problem, and the banks were eventually recapitalised at large public cost and sold to foreign owners. Myant's argument is that privatisation without a functioning legal and regulatory framework transfers assets without creating the ownership discipline that was its purpose. The book is academic and the argument is well supported.
Key takeaways 7
- Czech voucher privatisation transferred enterprise ownership to investment funds controlled by state-owned banks.
- Banks that owned the enterprises they lent to had no incentive to enforce credit discipline on them.
- Enterprises continued borrowing without restructuring, and the resulting bad loans were not recognised for years.
- Asset stripping by fund managers and enterprise directors was widespread and the legal framework did not prevent it.
- The 1997 currency crisis exposed the accumulated problem, and bank recapitalisation imposed large public costs.
- Myant argues that privatisation without a functioning legal and regulatory framework transfers assets without creating ownership discipline.
- The Czech transition's early reputation for success rested on indicators that concealed the deteriorating enterprise and banking position.
Who should read it
Analysts of privatisation and transition who want a documented case of ownership transfer producing none of the discipline it was intended to create.
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Comparative transition account; Czech vouchers judged against other sequencing choices.
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Where it sits in the reference 2
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