A new government may not be able to find a cure for the malaise that plagues the sick man of Central Europe

By MASSIMO CALABRESI /PRAGUE

ying in his hospital bed two months ago, fighting for his life, Czech President Vaclav Havel could not carry the weight of his own body, let alone that of the entire country. But once again this week, the playwright-turned-politician finds himself shouldering the burden of leadership. Last weekend, Czechs voted in national parliamentary elections for a new government, but thanks to the country's fragmented political scene an uneasy coalition will be necessary to form one. Now the task of shepherding a new administration into being falls to Havel, and the responsibility comes at a critical moment for the Czech Republic. For although the President is recovering from both the perforated large intestine that almost killed him in April and the cancer for which he underwent surgery in 1996, his country is only beginning to take the medicine it needs to get well.

Not long ago the Czech Republic was the star of Central Europe, posting phenomenal numbers in growth and foreign investment while keeping inflation and unemployment at bay. But the marvel was built on a faulty foundation. In spite of his Thatcherite rhetoric, Prime Minister Vaclav Klaus never pushed hard enough for the economic restructuring necessary to make the country competitive. Worse still, his laissez-faire approach to financial regulation permitted corruption to flourish, eventually driving away most Western investors. Growth slowed to almost nothing. Last year the Klaus government collapsed under the weight of Klaus' Civic Democratic Party's campaign finance scandals, and Havel named a caretaker government.

Under the leadership of Josef Tosovsky, a former central banker, the interim cabinet implemented much needed controls on the economy and jump-started the stalled privatization process. Now that progress is in jeopardy as the jockeying for a new government gets underway. "There is a momentum for change at the moment," says one Western diplomat in Prague. "It would be a great shame for the country if they lost another year mucking about trying to form a government." With the population deep in malaise and Westerners waiting for signs of recovery, much hangs in the balance.

Havel, who was re-elected to another five-year term in January, remains a powerful presence in the country. But his recurrent illnesses resonate with the people's discontent. A disturbing 66.7% of Czechs think their country is on the wrong track, up from 39.2% two years ago. "The current crisis is not as much economic as a crisis of moral standards," says Ladislav Bulir, 66, a retired Prague construction engineer. "The power is in the hands of people who are selfish [and] corrupt." That feeling is widespread. Most Czechs feel that bribery is necessary when doing business with the state and that the Klaus government was simply not interested in prosecuting corruption. About 40% think that political parties would go bankrupt if they were not on the take.

The greater the malaise, the greater the need for a scapegoat, and among the Czech Republic's 10 million people, the main targets are gypsies. More than 1,300 racially or ideologically motivated crimes have been committed in the country since 1990, according to Stanislav Penc, head of the Documentation Center for Human Rights in Prague. And if hate crimes are increasing, lesser forms of degradation are already widespread.

Corruption, in particular, is rife. On May 18, police arrested a mid-level officer of the Czech Defense Ministry's procurements section as he was accepting a $10,000 bribe. The company that blew the whistle said the 52-year-old lieutenant colonel threatened to cancel the firm's contract with the army if it didn't pay. Milan Repka, a spokesman for the ministry, said a recent review showed that only nine out of 732 contracts signed in 1997 were contested in public tenders.

Corruption has stunted not just national self-esteem, but also national finances. Western direct investment dropped from $2.6 billion in 1995 to $1.3 billion in 1997. And other structural problems have hampered the economy. Privatization of major banks is only now getting underway. Since many of them own investment funds which in turn own nominally privatized companies, many of those businesses have yet to feel the market imperative to reform. A rise in unemployment from around 3% in 1995 to 5.3% this year is taken as a good sign, but it was accompanied by a rise in inflation to 13.1% while growth has ground to a halt--GDP figures for the first quarter of 1998 indicate the economy shrank 0.9%.

Most attribute the structural problems to Klaus' policy of hands-off market economics. "That may work in a mature market democracy but it doesn't work in one that's in transition," says another Western diplomat. But this year there have been signs of progress under Tosovsky's caretaker government. In January, the parliament strengthened the central bank's supervisory powers and forced banks to separate their investment and commercial activities. It also approved the creation of a watchdog agency akin to the Securities and Exchange Commission in the U.S. In March, the government sold the country's third largest bank, Investicni a Postovni banka, to the Japanese investment bank Nomura for close to $100 million.

The question now is, Will the good work continue? The most likely man to head a new government is Milos Zeman, leader of the Social Democrats and Klaus' sworn political enemy. Zeman, 53, joined the Communist Party during the 1968 Prague Spring but was expelled in 1970 for his opposition to the invasion by Warsaw Pact troops. Both Zeman and Klaus worked as economic forecasters at one time or another under communism, although never in the same institute. Major changes are unlikely in relations with the rest of the world because Zeman is committed to early NATO and E.U. membership. "However," says Zeman, "there will be a significant shift in domestic policy." Zeman wants to deficit spend to bring back growth and increase support for the country's infrastructure. He says he will take a more considered approach to the privatization of banks, arguing that Investicni a Postovni banka was sold for one-seventh of what it was worth, and he has a long list of sectors that will not be privatized, including hospitals, schools and utilities. He even wants to buy back majority government stakes in utilities that have already been privatized.

But Western advisers like the Organization for Economic Cooperation and Development want faster not slower privatization, calling for increased action in "ownership restructuring, bank privatization and financial reform." And critics see Zeman as a threat to the economic well-being of the country. "[He] would create a very expensive social state," says Jan Ruml, chairman of the right-wing Freedom Union party.

Others see a Zeman government as part of the longer-term transition. "It's not a bad thing for the Social Democrats to find out what it means to govern," says the latter Western diplomat. And the Czech Republic's international commitments are likely to limit how much a Zeman-led coalition could do domestically. "The proximity of the whole E.U.-accession process has already started to impose discipline on them in areas that they just can't turn around," says the diplomat.

Another limitation will be Zeman's need for coalition partners. It is a calculus that will call for concessions, and that's where Havel's leadership comes in. Whether he asks Zeman or someone else to try to form a government, he will have to negotiate between parties over the price of power. The need for a stable government will once again test Havel's political agility and the thoroughness of his recovery. Success will return his country to good health; failure will mean continued stagnation and malaise. --Reported by Jan Stojaspal/Prague

--Reported by Jan Stojaspal /Prague