Economist Jan Svejnar advises post-Soviet Bloc countries

April 26, 2011

Professor Jan Svejnar, the son of a prominent development economist, was forced to fee his home when the Soviets invaded Czechoslovakia in 1968. Svejnar, who lived through the rise of the Berlin Wall, and its undoing, is now an internationally recognized expert in transition economies, which he believes are a wonderful laboratory for anyone who wants to understand economic development.

It began with a wire fence in 1961. Then houses were razed all around the perimeter so guards would have clear lines of fire. A concrete wall was put in later, then reinforced and strengthened with barbed wire, anti-vehicle trenches, and guard towers. The Soviets argued that the wall was installed to protect its citizens from fascists, but others say it was built—at great expense—to control mass defections.

To the east, explains Czech-born Ford School Professor Jan Svejnar, there was autocracy, a centrally planned economy, Marxist and Leninist indoctrination, and shortages of goods and services. To the west: democracy, a free market economy, freedom of speech, and a flourishing standard of life. No wonder so many were fleeing the Soviet Bloc.

Jan Svejnar was 15 when the USSR reimposed its reign over Czechoslovakia through a military occupation. By then, the Berlin Wall "death strip" had been added, and the concrete enforcements begun. He joined hundreds of university students in protests, and had no plans to leave, but his father—a development economist—knew the communists would soon blacklist and persecute anyone who had extolled democracy and free market forces. The elder Svejnar found a visiting professorship in Nigeria and fed with his family.

Two decades later, after earning his bachelor's in industrial and labor relations at Cornell and his master's and doctorate in economics at Princeton, Svejnar had become, like his father, a noted development economist. So when the Berlin Wall was torn down in response to increasing civil unrest, and Vaclav Havel led the bloodless Velvet Revolution to end communist rule in Czechoslovakia, Svejnar quickly became Havel's top economic advisor, helping guide the country toward a free market economy.

In 1991, Svejnar and his colleague, Jozef Zieleniec, established the Center for Economic Research and Graduate Education (CERGE) in Prague to educate future leaders who could shape the economies of former Soviet Bloc countries. In the House of the Angel, on the Street of Political Prisoners, this American-style university has educated thousands of students from Kazakhstan, Ukraine, Romania, Russia, the Czech Republic, and many other post-Soviet states.

Today, the Czech Republic is a flourishing member of the European Union, and Svejnar has become an internationally recognized expert in "transition" economies—economies, like the Czech Republic, that shift from central, autarchic control to free market forces.



The lively Charles Bridge in present day Prague.

Picture a society where nearly all prices are set and every business is owned and run by the government—from the factory manufacturing hammers and nails, to the electric company, the phone company, the corner store, and the media. Now picture that country, in response to political or social pressures, suddenly turning all of those businesses over to private sector investors and allowing market forces to determine prices. This is an economy in transition, the "Big Bang" to some economists.

"Where natural scientists look to the Big Bang as the start of the Universe, we see here the unique example of the launch of a market system," says Svejnar, who believes transition economies are a wonderful laboratory for anyone who wants to understand economic development.

Studying these countries not only helps Svejnar explain the particular economic forces at work in transition economies, but also how advanced market economies might have looked at their earlier stages (before we had good data on them) and how developing economies with similar imperfections might respond to specific economic policies.

In this transition, some economists argue for gradualism. Others argue for economic shock therapy, a rapid privatization process. Svejnar is in the latter camp, but believes it's critical for transition economies to take time to establish a detailed legal framework to guard against monopolies, to prevent corruption, and to protect their citizens, before they make the shift.

"The goal of the legal system in a totalitarian country is to control the population and make sure that everybody behaves," says Svejnar. In the new legal system, he asserts, laws and policies need to be put in place that will guard against corporate and government corruption, combat unemployment and inflation, encourage long-term economic growth, and ensure that all citizens benefit from the new free market economy.

Svejnar's research shows that some transition strategies produce better results than others. For example, he argues, privatization of state property to foreign firms improves overall performance, but privatization to domestic owners—on average—did not. This finding initially surprised Svejnar, his collaborators, and the profession at large.

"Everybody assumed back in 1989, 1990, when things were formulated for privatization, that privatization was unambiguously going to lead to better outcomes," says Svejnar. In fact, while a few countries did succeed by privatizing to local firms, most did worse by privatizing to locals over foreign investors. Principally, Svejnar says, this was attributable to corruption (including asset stripping from previously state-owned firms) and limited ability to operate in a market system on the part of many local owner-managers.

Attracting foreign investors, says Svejnar, not only imports capital, but also knowledge, technology, and managerial skills. Plus, foreign investors introduce a climate of competition and train local workers. So when foreign firms come in, there's a positive spillover, he says; domestic firm performance improves as well.

Svejnar also studies unemployment rates in transition economies—an important measure of success. "In centrally planned systems, there was no unemployment," says Svejnar. "The planners assured that everybody had a job. It was also compulsory for everyone to work—if you did not, you were prosecuted as a social parasite." While everyone had a job, however, it didn't mean they were working. Effort, and hence productivity, was often very low.

To maximize employment, Svejnar emphasizes policies such as infrastructure development and job training, which enable workers to move from regions and professions where jobs are scarce, to areas where there is demand. Similarly, tax policies can be designed that encourage firms to hire workers, rather than discourage them.

Back in the Czech Republic, Svejnar's efforts on behalf of his country's transition economy did not go unnoticed. In 1997, Vaclav Havel offered Svejnar the post of prime minister, although he could not accept, having surrendered his citizenship as a teenager to enable his emigration. In 2008, his Czech citizenship restored, Svejnar announced his candidacy for the presidency of the Czech Republic. While he ended up losing the parliamentary election very narrowly to current president Vaclav Klaus, Svejnar ran a successful campaign and remains an influential economic advisor to Czech leaders.

At the Ford School, Svejnar teaches a well-received graduate seminar on leadership, sharing with students his well-earned insights on what makes a policy leader effective and how innovative leadership approaches can result in sound public policy.

Below is a formatted version of this article from State & Hill, the magazine of the Ford School. View the entire Spring 2011 State & Hill here.