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Czechia: what is the real price the country pays for its image?


 

What is the value of a certain country? On a large scale, it is the country’s image in the eyes of the global community. The positive image of a country is an important indicator for investors and great opportunities for the country itself. When it comes to Czech Republic, our perception of the country is still fragmental and ambiguous.
 

It is believed to be an eternal satellite of Germany and Austria and an opponent and ill-wisher of Russia. The Czechs prefer not to recollect what price the Soviet Army paid for their freedom (when liberating Czechoslovakia form the Nazis). However, they remember the Soviet intervention in 1968.

Czechia has its own place in Europe and its own “mission”:
·         It has no natural resources except for coal, clay, black lead and timber
·         Its products make up just 0.3% of the global GDP and 0.5% of the global export.
·         However, it comes 24th (between Spain and Portugal) in the rating of the most welfare countries (composed by Legatum together with Oxford Analytica and Gallup World Poll Service).
·         It is the 2nd post-communist state (after Slovenia) in terms of living standards.
·         The GDP per capita is $25 600.
 
How did this relatively small country (the population is 10.5M) manage to achieve significant success? How did it survive the global economic crisis relatively unscratched?



Czechia as an example for all the post-Soviet states

 

 

 

 

Some experts call it an example for all the post-communist states. Indeed, the West European Association of Traders and Investors under Masterforex-V Academy notes that during the pre-crisis years the Czech economy showed sound and stable growth (over 6% per year). Even today the economic situation in the country is much better than in some other European states. At least it is on the list of the countries with medium-size debts. Its credit ratings are the following: Standard & Poor's is А, Fitch is А+. Last year the Czech economy completely recovered from the crisis (the national GDP growth was equal to 2.2%). There are several reasons for that:
·         Open economy. Like all the post-communist states, in the 1990s Czechia suffered from a severe economic crisis (it is sufficient to say that in 1989-1993 the GDP declined by 32%). It was mainly conditioned by the break of the old economic model, the disintegration of the USSR and the Socialist camp, whose demands were supplied by the military and heavy industries, disproportionally developed in Czechia, as well as the disintegration of Czechoslovakia and the breakup of the economic ties between Czechia and Slovakia. There was rapid privatization held in Czechia (the state-owned share of the national GDP was reduced from 97% to almost 20%), as the result of which 70% of the country’s leading enterprises became entirely or partially private, owned by foreign corporations. The foreigners started new factories, endless investments of euro, dollars and pounds were poured into the Czech economy. In connection with this, Czechia outnumbered many countries of Central Europe and the entire world in term of foreign investments per capita. In their turn the investments made it possible to upgrade the manufacturing industry and technical infrastructure over a relatively short period of time.
·         In 2004 Czechia joined the EU. Its economy became reoriented towards the western market (these days the EU countries import 85% of the Czech products and export 70% of their products to Czechia). This factor together with the EU’s financial aid (in 2007-2013 Czechia is expected to get 27B euro) significantly accelerated Czechia’s economic growth. Even though, the Czech are said to have a special attitude toward the EU. For example, the Czech President Vaclav Klaus was continuously delaying the acceptance of the Lisbon treaty. He was the last one to do this as he didn’t wanted to sacrifice a part of Czechia’s independence. The Czech were suspicious of the common Euro currency, they were not in a hurry to enter the Euro zone. According to numerous experts and the Czechs themselves, it is the preservation of the Czech Krona that helped the county to survive the global crisis relatively unaffected. By the way, according to the latest surveys, only 22% of the respondents want the Euro currency to change the Krona for the Euro currency.  
·         Openness to foreign investments. Czechia is considered to be one of the most perspective EU countries in terms of foreign investments. If to believe the consulting company called Ernst and Young, Czechia comes 9th in the world in terms of investment attractiveness. During the pre-crisis years direct foreign investments in the Czech economy exceeded $10B a year, which was favored by the following factors:
-          the country’s geographical position (you can reach any EU country relatively fast)
-          Shengen membership
-          Simplified procedure of legalizing foreign investments. For example, when the country started lacking investments, the government allowed foreign residents to get the Czech citizenship really fast as long as they started a business in the country, thus getting talented proprietors and their capital.
-          It is believed that Czechia can boast the simplest procedure of buying fixed property in the entire EU. The Czech fixed property is of high quality and is much cheaper than in Spain, Italy or France. Czechia has been popular with tourists, thus making the Czech housing market quite liquid (annual profit sometimes reaches 15-20%) and consequently popular with buyers.
-          Czechia is considered to have the lowest crime level in the EU
-          The country’s taxation system is quite loyal: the income tax is 19%, the VAT is around 20%
 
It is not accidental that Czechia comes 28th in the rating of economic freedoms composed by The Heritage Foundation together with the Wall Street Journal (which is not bad).
·        The Czech economy is well-balanced. It holds true for many of its aspects. Firstly, it is oriented both to the domestic and external markets (both Eastern and western countries). That is why the decline in the economic ties with the US during the global crisis was compensated by the increased demand for Czech products from the CIS and Asian states. Secondly, the banking sector, big-scale manufacturing companies and mid and small-scale businesses keep developing in the country. Thirdly, all the major economic sectors are equally developed (from the heavy to light and food industry). In general, there is no significant imbalance in the Czech economy.
·        Manufacturing industry. Czechia, as opposed to most post-communist states, has managed to preserve motor and engineering industries, electronics, energy complex, chemical and iron-and-steel industries. The manufacturing industry makes up almost 1/3 of the national GDP. There is an interesting comparison: In the EU countries the industrial sector employs 24% of the working population (on average) while in Czechia it is 37%. Today the manufacturing and transportation sectors dominate the services sector in the Czech economy. Are there many small countries that can come up to Czechia in these terms?
·        Medium and small-scale business. No EU country considers its medium and small-scale business as important as Czechia does. It occupies 35% in Czechia’s manufacturing sector, almost 70% in construction sector, over 90% in trade and 88% in service sector. It is clear that such values couldn’t have been reached without governmental support and favorable business climate in the country.
·        Export-oriented economy. Before the crisis the small Czechia was one of the world’s leaders in terms of external trade volume per capita, outpacing Japan, Great Britain, France and Italy. This economic vector (close ties with Germany) helped the Czech economy grow by 10% in 2010, which was better than expected. For example, in November 2010 Poland (which is much bigger than Czechia in terms of territory) exported to Germany 10% less products than Czechia.
·        Conservative financial system. The global financial crisis didn’t damage the country’s banking system too much. The reason is weak economic ties with the major financial powers (the local banks didn’t invest in the US mortgage bonds). Moreover, the offices of the Western banks (98% of the local banks assets) are engaged mainly in the banking activity within the country. It helped Czechia to avoid significant losses.
·        Tourism. It is common knowledge that Czechia belongs to the 10 most visited countries of the world. This country has a lot of interesting things for tourists: beautiful landscapes, ancient castles and dungeons, luxurious resorts, and of course the famous Czech beer. The hotel and transportation infrastructure in Czechia is well-developed as well. The tourism allows the county to earn big money – over 3.5% of the national GDP.
 
In general, according to the WEF rating, Czechia comes 36th in terms global competitiveness.



 

Can one be really that optimistic about the Czech economy?
 
The thing is that numerous economists say that Czechia is going to have serious economic problems in the future.
And it is not only about the global economic crisis that couldn’t but affect the country’s export-oriented economy. The problem is that it has recently overcome the recession and is showing too weak growth, with some sectors declining:
·         The sovereign debt has already reached 39.8% of the national GDP and is still growing. Of course, we could say that the sovereign debts of Hungary and Poland are bigger (78,9% and 53,9% correspondingly). But the Czech debt keeps growing. In 2012 it is expected to reach 44% of the GDP.
·         The unemployment level is 9.7% and is expected to keep growing as well. Czechia used to have the lowest unemployment rate in the region. But later Forbes even put the country on the list of the worst countries in terms of labor market.
·         The inflow of foreign capital has been reduced
 
Masterforex-V Academy experts concede that Czechia may face difficulties in the future. So what are the evident weak spots of the Czech economy? Only having answered the question we can define the real value of the country, i.e. the degree of its investment attractiveness. What do the Czechs keep paying for? First of all, they are paying for delayed social and economic reforms. It is confirmed by the following factors:
·         A decline in the pace of Czechia’s economic growth. Even though the Czech economy has overcome the recession, the pace of its economic growth is declining (a 1.75% decline is expected this year). Here are some reasons why:
ü Untimely (delayed) innovations. It is Europe’s 11th worst innovator.
ü Czechia’s manufacturing industry starts yielding to new industrial powers. That was a wake-up call when the first Chinese bus appeared on Czechia’s highways.  It is difficult to imagine deeper humiliation for a country producing its own buses.
ü Czechia is economically dependent on Germany. Experts expected the strong German economy to help the weakening Czech economy. However the benefit still seems temporary.
ü The labor power becomes more costly every year, which makes the products more expensive and less competitive as well, causing bankruptcy and unemployment growth.
ü High taxes and unstable (changing) taxation system because of the permanent tough confrontation of the major 2 political parties. It makes Czechia less attractive for foreign investors and causes the decay of the local small-scale business. It comes 74th in terms of business conditions, yielding even to Mongolia and Namibia.
ü The Czech economy is dependent on the import of raw materials. For example, Russia supplies 70% of Czechia’s demand for crude oil, 80% of its demand for gas. All the Czech nuclear plants are powered by Russian atomic fuel.
 
·         High public expenses. Czechia used to be considered as a developed socialist state, maintaining various social benefits. It is clear that under such serious economic problems these benefits were a burden for the Czech budget, only aggravating the overall situation. Last year 45% of the national budget was spent on social benefits. It is obvious that Czechia needs healthcare, social and pension reforms. Of course such measures would be unpopular with common people. That is why no government dared carry out such reforms. But last year the center-right government finally started a series of “painful” reforms. In particular, public-sector salaries were reduced by 10% (even the parliamentarians cut their salaries by 5%). Child benefits were significantly reduced as well.
·         Ill-structured labor recourses, which is conditioned by the following factors:
ü Low birth rate. In terms of the pace of population increase Czechia comes 212th in the world.
ü Relatively small amount of highly skilled experts and low education level. It is surprising that the Czechs are not “big fans” of education. According to the official statistics, only 10-15% of the population gets higher education. The others prefer to continue their parents’ small-scale businesses.
ü Labor migration. For example, many Czech physicians and nurses move to Germany and Austria, as the salaries are much higher (a nurse in Germany makes €3000 on average, in Czechia - only €950).
ü Nation aging. It means that soon the expenses on healthcare and pensions will increase.
ü Migrant laborers, which aggravate the unemployment situation.
 
·         Corruption.  It is believed that it is difficult to achieve something without bribing. Czechia comes 53th in the Transparency International rating. The local mass media are constantly reporting about some bribery scandals involving even high-ranking officials.
·         Euro. Nowadays most Czech politicians are concerned about the declining inflow of foreign capital, especially in advance of entering the Euro zone. They believe that it is the introduction of Euro that will help to attract more foreign investors and to cure the ill Czech economy. However numerous experts say that it may happen not earlier than in 2020. The authorities will have to reduce the budget deficit (5.9%).

 

 

 

 

 

As for the Czech themselves, they are quite polite, reserved and unconflictive. The Czechs are conservative and devoted to traditions. They prize their family values. Most Czechs are very thrifty, some of them even stingy. They are quite responsible and disciplined. They prefer comfort to elegance. Most of them are not emotional.
 
So, what conclusion can we make? It is obvious that Czechia still has the reputation of a promising and stable country.
 
Masterforex-V Academy experts and Market Leader offer you to participate in a survey by answering the following question at the forum for traders and investors.
 
Will Czechia manage to become an economic power?
 
·         Yes, it will. It has all the necessary preconditions for that.
·         No, it won’t. It will remain the “satellite” of Germany and Austria.

 

 

You are free to discuss this article here:   forum for traders and investors

 

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