Czech Republic: The Quiet Achiever

SEEKING CONVERGENCE

Louis says the Czech Republic, burdened like many other European nations with an aging population, runs the risk of reverting to growth rates of 1.5% to 2% after 2016. These levels of growth would be fine for an advanced economy like France or Holland, but not for a former Communist country still trying to converge with its EU partners after years of state-run mismanagement coupled with post-Lehman Brothers fallout.

Foreign direct investment is respectable, with some €89 billion invested since the collapse of Communism. Last year Hyundai Mobis was one of the many companies to invest, cementing the Czech Republic’s reputation as a car-manufacturing hub. But total new FDI—just under €6 billion—suggests a slowing trend, with greenfield projects few and far between. However, the webpage of CzechInvest, the state body that promotes the Czech Republic as an investment destination, includes as major priority sectors nanotechnology and advanced materials, high-tech mechanical engineering, aerospace and electronics and electrical engineering.

“In essence the country needs a new growth model to enable it to converge in per capita income terms, in productivity terms and with its business environment,” Louis says.

A recent IMF report on the Czech Republic suggests that the Czechs’ focus is on making their business environment more transparent (including making state tenders more open) and improving the governance of state bodies. It identifies infrastructure, particularly roads and motorways, as a serious bottleneck.

“Labor market reforms should aim at increasing participation among women with children and low-skilled workers, while greater emphasis should be placed on mitigating skills mismatches,” the IMF report stated. “Priority should also be given to promoting research and innovation, enhancing apprenticeship programs, simplifying tax compliance and other administrative procedures,” the report concluded.

The European Commission says tax evasion needs to be tackled and collection made simpler and less costly for individuals as well as authorities, adding that the government has dragged its feet on other much-needed laws. “There is a lack of transparency and a long duration in the procedures for obtaining building and land use permits, which has held back public investment,” the EC states.

“Public procurement transparency is also a concern,” it adds, noting that the awarding of public contracts is not published in a centralized database.    

The need for a more open business environment is reflected in the Czech Republic’s ranking in Transparency International’s Corruption Perceptions Index (2014). It is 53rd out of 175, well below the Baltic states, Poland and Hungary.

The government and the Czech central bank, the CNB, have done their best to support export competitiveness by maintaining a fixed-peg exchange rate against the euro of 27 Czech korunas, first set in 2013. Since then, the CNB has had to intervene to prevent the koruna’s appreciating on numerous occasions, which has led many to suggest the policy should be abandoned.

“CNB foreign exchange reserves have been rising directly as a result of this policy, which has led many local politicians to attack the peg: The Czechs are lucky their currency isn’t traded more widely, or there might be major speculative attacks against it,” says Commerzbank’s Ghose.

So as 2016 gets under way, the mood within this prosperous Mittel-European country is something that the Good Soldier Švejk would recognize: It has done pretty well without trying too hard and has comfortably maintained its place among the better-developed countries of Central Europe. However, if it is to realize its dreams of catching up with the rest of Europe, it will need to try a little harder.

GFmag.com Data Summary: Czech Republic

* Estimates                                                                            
Source: GFMag.com Country Economic Reports