 First of all, let me apologize if I'm going to speak English because if it is true that I've studied French in school, it is also true that the school was public. As you've heard, I'm supposed to talk about the Italian model. Now I know there are Italian models in fashion, in cars, but what about politics? I don't think we have any model to export. Supposedly, I should talk for 20 minutes. Now that's a very long time, especially in terms of money. The Italian government spends $1.2 million every minute, so you understand how worried I am about it. Instead of a model, I shall try to tell you a story. The story of what has happened in my country in the past two years. A veritable earthquake that has completely changed the rules of the game in politics. As a background, let's go back to the beginning of 92, when there was the widespread perception that the Italian system of government was hopelessly in crisis. In the 1980s, we had a terrible acceleration of government, of the size of government. In 1980, total public sector revenue amounted to 34.6% of GDP. At the end of 93, it was 48.8%. So revenue has grown faster than inflation, faster than income. It has absorbed an additional 14.2% of GDP in 13 years. Despite, or because, this acceleration in taxation, public spending, which in 1980 amounted to 43.5% of GDP, in 93 amounted to 58.6%. Public sector debt increased so fast that 90% of all the debt of Italy today was made during the 80s, from 1980 on. To give you an idea of the size of the debt, at today's exchange rates, the Italian public sector debt amounts to two and a half times the total foreign debt of all of Latin America. Our yearly deficit alone is larger than the yearly deficit of the other 11 European countries of the Union. Italy is an economic giant. Yes, absolutely. As for the efforts to reduce the size of the debt, the past, the two governments before the present one, are widely praised in the national and international press as having done a great deal to contain the financial disaster. Well, figures tell a different story. From the end of 1989 to the end of 1993, public debt increased by 700 trillion lira. Now, in real money, that's $500 billion, which is money. 40% of all our debt was made in the past four years. So this was one problem. Together with this problem and the two are intimately related, corruption exploded. A big wave of scandals came out. We had several cases involving politicians, ministers, members of parliament, and so forth. And many people came to the conclusion that all our problems originated from our electoral system of proportional representation. The idea was that proportional representation increases the number of political parties. When you have too many parties, you have coalition governments, that is governments made by more than one party. And therefore it's not the people who choose the government, it's party leaders who choose the government after the voters have made their choice. So everybody started talking about that the root of all evil was partito gracia, a party rule, and that in order to solve the problem, all that was necessary to do was to change the electoral system and things would be going very well, move from proportional representation to a new minimal system. I don't agree with this analysis at all. I think electoral systems are criticized all over the world. The German system is criticized, the French system is criticized, the English system is criticized, the American system is criticized. The fact is that people blame the midwife for the baby. They criticize the electoral system, whereas the problem is what politicians can do after they are elected. The problem is not how we elect them. The problem is what they are allowed to do once they are elected. I don't deny that electoral systems are important, but they're only part of the story. They corruption. I humbly submit to you what I shall call Martino's law corruption. Corruption is always and everywhere, a political phenomenon. In order to have corruption, you need government intervention. Without government intervention, you don't have corruption. Let me illustrate. If I spend $10 and make $100, that's a good deal. If I spend $100 and make $10, that's a bad deal. If in order to make $10, I make someone else spend $100, that's politics. Anyway, what we did is we changed the electoral system, and we adopted a 75% uninominal that is single candidate, majoritarian system. 75% of all senators and deputies are elected on a first pass-the-post basis, and 25% are elected in terms of proportional representation. Now, what happened is that at the end of 93, we had local elections with the new system, and the left had organized itself into an aggregation of party, rassemblement, you would call it in French. And with 34% of the votes, they got 82% of the cities. Since there was no alternative organized on the other side, the left was organized, but there was nothing else on the other side, with 34% of the popular vote, they won the government of 82% of the cities. All the major cities have a left-wing mayor. At that point, we realized that if we didn't do anything, Italy would have a left-wing government. And by left-wing government, I mean a government dominated by the reformed communists, PDS, the Democratic Party of the Left, by the unreconstructed communists, called refundazione comunista, and by assorted lunatics. So we decided that something had to be done. And I admit this successful entrepreneur, you probably have heard of him, his name is Silvio Berlusconi, and he had decided to do something to offer Italian voters an alternative to the left when election time came. The interesting thing about Mr. Berlusconi is that he never laughed when I expressed my libertarian views. You know, for years, the radical free-market years in Italy have been very few. In fact, at the time of the Mont Pelerin Society conference in Stockholm, not many years ago, Sergio Ricossa, Beniro del Punta and I were on the same flight, and Ricossa said we should never do that because if the plane falls, all libertarians will disappear. So Domenico da Impoli was on the same flight, yes, that's right. It would have been a disaster. The liberal tradition in Italy would have disappeared. And expressing liberal views in Italy for many years was a very tiring and difficult task because people would not listen. Instead, Berlusconi did listen, and so together we put up a program in fact, I wrote most of it, of radical reform. The program included a single rate income tax, it included school choice and education vouchers, it included the privatization of public health and health vouchers in its place, it included reverse revenue sharing in the relationship between central and local government, extensive privatization, you name it. A program was probably the most radical program ever presented not only in Italy, but in Europe. In fact, Mrs. Thatcher would look like a moderate socialist compared to a program. These were the views that were debated during the campaign. Mr. Berlusconi organized this movement called Forza Italia, you probably heard about it. And the debate for the elections began. And I remember those terrible weeks during which, at the beginning especially, Berlusconi didn't want to go on television because even though he's a TV tycoon, he told me, he said, I don't know anything about television, you go and debate. And so I had to go debate thanks on TV. And it was rather, you know, nerve wrecking. But for me, why did I do it? I mean, I was in university, I was happy, academician, tranquil life. The year had nine months. And there were three hours in the week and 45 minutes to the hour. So why did I go into the rat race of politics? Because for the first time, I saw a chance of seeing my views debated in public. And that was what I've always wanted. Let me stress one point. I had and I have no delusion about that radical program being implemented soon. The resistance of interest, the opposition or pressure groups will make it impossible to have the radical reforms that we were talking about. We'll try, but I doubt that we'll succeed. However, it was very important to have the ideas debated because this is the beginning of a process that might eventually lead to the kind of change we want. It's the beginning. If those views were not debated, we wouldn't have had any chance. So that was why I entered politics. I'll cut a long story short. The campaign was very hard. I did not want to run for parliament. In fact, 24 hours before the deadline, I said, no, I don't want to run for parliament. But Petrusconi was very insistent, and so I had to run. In fact, not only in one constituency, but in two. And since I live in Rome, he thought it wise to make me run in Sicily, 500 miles south, and in Milan, 500 miles north. During that terrible month, I lost seven kilos. I had to give, I don't know how many public speeches. I remember one in Catania to 1500 people in Sicily, at the end of which I was forced to hug nearly the whole population, including a big dog. And finally, the campaign came to an end. And the day the campaign was over, Carol and I were going back to Rome in the car when Petrusconi called me. And he said, how do you feel? And I said, terrible. And he said, why? And I said, because if things go the way you hope, I'm going to be elected. And if I'm elected, my wife will have to sleep with a politician. Anyway, as it turns out, we won the elections. We won the elections on a clear mandate. And the mandate was that of changing things. I didn't want to enter the government. In fact, I told Petrusconi, he said, leave me out of it. And he said, no, you must become a member of the government. And I said, OK, if you insist, I want to be a foreign minister. And he said, why? You've always been an economist. You campaigned for our economic policy. No, I said, I want to be a foreign minister because the foreign ministry is close to my home and it has a nice parking lot. And that's how it became a foreign minister. Now, what does all this amount do? I mean, what can we learn from this very Italian picture? One thing, there is a great demand in all our countries for new ideas. Any politician who takes the risk of expressing radical pro-free market views is going to succeed. We must have the courage to support these views even though we know that in the short run we cannot implement them. We must start using elections as a pedagogic device to teach people the importance of freedom. They are prepared for it. They want to hear it. So if I could give a bit of free advice, if the price is too low, to my French friends I would recommend that they start moving towards the radical libertarian position. And then maybe we will all succeed. One final note of optimism. If Italy succeeds in solving her present problems I shall consider that as definitive evidence that God is Italian. Thank you. Thank you very much, Professor Martino. And now I will give the place to Prime Minister Vasslav Klaus who will give his lecture about the Czech model if it exists. Mr Chairman, thank you very much for giving me a chance to be included in the optimistic part of your debate. Well, I guess that my country deserves that position. Well, now listening to Antonio. Well, I cannot say that the revolution or almost revolution in Italy was something important but it was still something much less important than the revolution in Central and Eastern Europe in the former communist world. Because I can't describe my life before the Velvet Revolution in November 1989 in such a positive way as Antonio Martino. I was bent from having the slightest chance to have a speech at the university in my country because they were sure that I would have spoiled the students so our life was not that happy as Antonio's before that. So that's a difference which we, in my opinion, shouldn't forget. And I wanted just to ask Antonio another question. He said that his French maybe is not that good because of the public school. I just wanted to ask where did he learn his English? I'm afraid it was public school as well. And as far as I know, everybody in France is studying at the public school so to make those easy correlations would be too simplified. So let's say a few words about the Czech case. I agree that there is no model to export. On the other hand, it seems to me that after five years of participating in such a radical, systemic transformation, such a radical profound, deep systemic change, you discover some rules, some generalities. Simply you discover that the transition has some logic which you have to know and the more you understand it, the better. So let's maybe talk about some generalities, not about modeling our case. It seems to me that the Czech Republic has now entered what I call the post-transformation stage already. I would divide, I would structure the whole process in three stages. The first stage is the pre-transformation stage, then is the transformation stage proper and then the post-transformation stage. When I speak to non-economists and non-experts, I try to make an analogy which in my opinion explains the point. Well, the first stage is the waiting room in a hospital. And I must say that in the waiting room in a hospital you must undergo various preparatory tests and to do some preparatory things. I must say that there are still post-communist countries which have been waiting in the waiting room. They are still dreaming about the possibility to take the pill instead of going to the surgery room. So as an economist I would be able to name those countries. As a prime minister I must say that there are some. And you may guess that countries belong to that group. So that's the first stage. In our country it was the year 1990. The second stage is the surgery. That's the crucial moment of the profound systemic change when the basic, basic steps, measures are taken. They are not easy. They are sometimes painful to the citizens of the country. And the third stage is either the rehabilitation center of the hospital or I prefer to talk about the fitness center. So I would strongly argue that the Czech Republic is already as the fairest and probably the only post-communist country in the fitness center already. Simply improving our muscles to participate in the next Olympic Games in all disciplines available. It seems to me that the structuring has deeper logic and I can debate not now, not here, the differences in those individual stages because in all those stages the role of the politics, the role of the government is different and has different tasks. And it's important to know that it's for the young generation to write doctoral dissertations exactly about that. So when I say that we entered, we entered the post-transformation stage already where as I always say the heroes of the game are not the radical reform politicians but speaking in this atmosphere, the heroes of the games are the Schumpeterian innovators, entrepreneurs, managers, simply not the political side of the matter but the real people at the micro level. So the question is what's the mechanism which brought us to that stage, to that level and I will give, some of you will be there, Monday morning at the Montpelerin Society meeting in Cannes, I decided to choose as a topic of my speech something about the mechanism which I will not repeat here but just to tell you the title of my speech, suggests immediately the topic, the title of my speech is systemic change, the delicate mixture of intentions and spontaneity. It's the famous Hayekian topic and we speak about spontaneous order, we speak about radical, economist politicians organizing the dramatic change and the reality is somewhere in between, the reality is the mixture of all that and to understand the logic of that mixture is in my opinion extremely, extremely important. I disagree with the ideas that we have to follow some optimal sequencing rules that we have to do one thing and other things. No, that's definitely not true because you are not opposed with passive objects, you are on the other side of the game, millions of citizens of your country who are active players in the game so you don't dictate the transformation, you don't dictate the transition, you are a player as well and exactly the mixture of that is very interesting and intellectually very revealing so the task of politicians and of intellectuals is to understand that logic and to be able to participate in that because the task is clear, the task is to organize or to co-organize the transition and at the same time to minimize non-negligible transformation costs. We economists think in terms of costs. This is by the way one of the most fashionable topics to discuss different aspects of costs. This is the development of economic science in the last decades to develop that term which is traditional in economic science. So the transformation costs to minimize them which means to make the transition as fast, as smooth as possible. Now what are the crucial aspects of the game? It seems to me that it has at least three layers, three dimensions. The first floor, the first dimension is an ideological one, the second one is a political one and the third is an economic one. So speaking about ideology, you must be able to formulate a clear and transparent vision of a society you would like to have. That's absolutely crucial and again I would argue that there is a difference between our country and the rest of the post-communist world. Our vision is more transparent and more straightforward than in any other post-communist country. It has some historical roots because we had our 60s. We had in our country our flirtation with the third way some of you may remember the reforms in Czechoslovakia in the 60s to find socialism with a human face. This is something that was a crucial topic for all of us. We have been attacking that at that time. I was in the post-graduate age and that's something for us absolutely crucial. So the country underwent that stage, discussed it, debated it more or less openly already in the 60s. Then the Russian invasion came. We all of us were fired from our academic positions not having the three hours of lectures, weeks doing jobs much less interesting and much less entertaining. But I think it helped us ideologically so our position is much stronger than in other countries and we were extremely lucky. At least my generation was extremely lucky because of that dramatic crash connected with the Prague Spring and the Soviet invasion. We were absolutely out of any possibility to participate in the old regime. In other countries, with their Pierestroika style reforming in the 70s and 80s, almost all our friends with some exceptions, I see, Dr. Wyniecki here in Poland, almost with a few exceptions, all our friends in other, at that time communist countries were members of various government commissions subcommissions, preparing the Pierestroika style reforms. We were not able to do that. Therefore our position was much more aggressive and much more straightforward, much more ideologically clear. So that's the ideological side of the matter which in my opinion is absolutely crucial. Second is the political side of the matter which means the ability of politicians to sell the vision to the citizens of their country. It was a tremendous job and simply we have to persuade the citizens of the country that this is the correct way how to do it. We have to persuade them to enter politics to participate in the political process and to create basic national consensus supporting all of that. Again it seems to me that my country relatively succeeded in that more than some other countries. So that's the political side of the matter which I as an economist after five years almost of experience in a political life I consider probably even more important than the technical, economic side of the matter without basic elementary support. You simply can't do anything so a permanent campaigning, travelling all over the country from Catania to Milano and making public speeches. Definitely this week I had three such rallies in my country permanent job, permanent attempt to explain, argue, defend is absolutely crucial. And finally a few words about the economic side of the matter the reform strategy what are the basic moments, basic arguments simply we started and it seems to me that we have to start with a shock the elimination of state paternalism the elimination of subsidies of all kinds simply returning the true value and true costs to all assets and this is a shock for the population because they lived in a subsidized world where simply nobody knew what the real price of anything is and to do that is a change it changes the psychology it changes the mentality of the country and it must be done in the preparatory stage in the first stage already this is my experience the second stage really is to liberalize and deregulate markets standard role to liberalize prices foreign trade and all of that the crucial moment or the crucial aspect of the game is to introduce and maintain macro-economic stability because with huge inflation you don't have a chance to do anything so I'm quite happy that in my country at least I hope our inflation is already firmly in the one digit world one digit world below 10% this is still higher than in western Europe and it will be as an economist who wrote his doctoral dissertation on inflation it seems to me that the core inflation is still below 10% it's not 2, 3, 4% in western Europe just now so I see as a problem to go down this inflation to that level that will be a difficult job with all the adjustment processes still going on which creates some inflationary bias into the system as you know a country with very dramatic macro-economic policy as a finance minister I presented three budgets to the parliament as a finance minister as a prime minister this Wednesday we presented my third budget into the parliament and you must admit that six state budgets all of them balance budget without one crown of deficit is something which deserves already a debate and this year, months ago we came with a proposal to incorporate into our constitution a rule simply making it obligatory for the government to present a balance budget as part of our constitution I think again this is something which some brave European Union members could copy from the Czech Republic and I must express my gratitude to Antonio Martino because we met two, three weeks ago in Chernobyl, Lago Di Commo with a conference in Italy and it was immediately it was days after our presentation of the idea of the balance budget as a constitution rule and our media suppose that I am absolutely crazy to suggest anything like that and they asked Martino what he thinks about that and his answer was so positive and unexpected, he didn't expect that question and I have to express my gratitude Antonio, it was very helpful, really the role what belongs to the reform strategy is to enact into our constitution and legal system something what in the Hayekian tradition we can call foundational rules as regards basic institutions of the market economy we have to transform a lot of existing institutions and the final crucial moment is to privatize state-owned firms and practically in my country the privatization will be not will not start the privatization will be over at the end of 1994 there will be nothing to privatize we will have just some public utilities the debate will be whether to privatize railway system or something like that but there will be no standard firms still for privatization so privatization as a systemic change as a part of the transformation of a political, social and economic system is over we will have residual privatization cases as in Italy, France or any other western European country today, Sweden simply individual residual cases which is a standard business inside western political system but I think the privatization as a crucial cornerstone the transformation process is practically over and I think it was rather interesting and successful to go through that process so this is what I wanted to say here this morning and I think that's enough thank you very much