Czech competitiveness under the spotlight

Tomáš Víšek, Michal Nebeský, Libor Michálek, Martin Tlapa, Irena Bartoňová-Pálková, photo: archive of Czech Senate

Competitiveness is one of those vogue terms that appears to be employing a lot of grey matter around the world. And the Czech Republic is no exception with the government, business groups, and recently one lawmaker from the upper house of parliament, the Senate, looking over the entrails of the local economy to determine how it’s doing compared with the rest of the world and what the future holds.

Tomáš Víšek,  Michal Nebeský,  Libor Michálek,  Martin Tlapa,  Irena Bartoňová-Pálková,  photo: archive of Czech Senate
That Senate member. Libor Michálek, was responsible this week for holding a seminar at parliament at which businessmen, academics, ministers, and leaders of business groups were invited to give their opinions about how the Czech Republic is doing on competitiveness. Mr. Michálek explained the reasons for staging the event.

“In the Czech Republic a series of different strategies have evolved and the aim of this seminar is to define what priority areas need to be addressed where the laws are preventing the Czech Republic from being more competitive. The idea was to get around the table representatives of the government, business groups, the unions, and the academic sector and hear from them what they think the priorities should be.”

Mr. Michálek has his own views on the competitiveness issue, guided in part by some of the recent reports on how the Czech Republic is doing compared with its peers.

“We are getting slightly better according to some of the statistics from some of the worldwide surveys. Personally though I am convinced that the potential is for us to do a lot better. Given that we are here at the Senate, I am mainly focused on what we can do from a legislative point of view with a view to barriers to competitiveness that are holding us back. One of our priorities is the construction of infrastructure but we have such a complicated approval process that it takes for example 12 years to get clearance for a motorway to be built in the Czech Republic while in Germany it just takes two years.”

Another one of the speakers at the seminar, Tomáš Víšek of the Czech branch of the worldwide consultants McKinsey & Company, had a slightly different perspective. Yes, the Czech Republic has improved over the last decade or two but the advances by other countries in Central Europe have been a lot more dramatic. For example, the increases in purchasing power parity of citizens from Estonia, Lithuania, and Slovakia has been around twice that of the Czech Republic over the last decade or so averaging at around 6-7 percent.

“I am convinced that the potential is for us to do a lot better.”

Mr. Víšek said the Czech Republic’s weaknesses are in three main areas: the institutional aspects of administration and public life; education; and poorly performing aspects of the local labour market. On the first, the Czech Republic now lags way behind the likes of the Baltic state of Estonia, which Víšek says has taken massive steps to introduce lean, efficient, and clean government. The Czech Republic often talks about the problem but action does not follow the words and the country is perceived to be doing worse than most Central European countries with the exception of Slovakia.

The McKinsey partner warns that the trend has been negative in education and labour costs are higher than in many other Central European countries that have made the transition from planned economies.

Mr. Víšek also pointed out another factor that is not often citied, the lack of major cities in the Czech Republic. Half of the population of the Czech Republic lives in towns and villages of less than 10,000 people. And it’s a stark fact that most wealth creation in developed modern economies takes place in cities with populations of more than a million. On average the people in such cities create twice as much wealth or more than people in much smaller cities. Whether this is a chicken and egg situation, where the talented get drawn to big cities because of the higher paying jobs or the city environment creates the conditions for such people to thrive are other aspects of the question.

There’s another factor as well, Czech banks are fairly conservative. In fact, they are around half as willing to lend money to business as their peers in Finland when the amounts being sought and security offered is taken into account.

Illustrative photo: Klára Stejskalová
And the legacy of around 40 years of Communism has contributed to the fact that the Czech Republic still has many large companies that make a disproportionate contribution to the economy and the small and mid-sized ones are often lacking. If you put the Czech Republic and Germany side by side, the Czech Republic often appears like an upside pyramid when you look at the size of the companies and employees while in Germany there is a much broader base of small companies at the bottom and the pyramid is the right way up.

And the weaknesses of the labour market was one of the main themes of vice president of the Czech Chamber of Commerce, Irena Bartoňová-Pálková. She warned that one German owned automotive company in the Czech Republic has become so desperate about the possibility of hiring semi-skilled workers that it is now mulling moving production capacity out of the country.

“The German owner is now looking to open new production lines but can’t find the workers needed. It is now considering moving those lines to Poland or some other country because of the shortage and fact that it does not see even any prospect of recruiting them. So it could happen that we could lose our position as a strategic country for the car industry and that we can imagine that would not be a very pleasant prospect.”

Bartoňová-Pálková lambasted the government moves in a pilot project to attract workers from Ukraine, saying that the moves had been poorly conceived from the start. And she warned that moves to increase wages in the Czech Republic, one of the consistent themes of local unions which highlight the relatively low earning made worse in comparative terms by the low currency, should pay close attention to productivity. She highlightetd the fact that Czech workers are still only around half as productive as their counterparts in Germany across the common border.

“It could happen that we could lose our position as a strategic country for the car industry.”

American Chamber of Commerce president Michal Nebeský says the Czech Republic scored half way, 14 out 28 countries, in a ranking of European Union countries. He says the government has over the last decade failed to fine tune the public tender rules so that they are a means of rewarding the best companies and boosting competition. With a new set of public tender rules now in the pipeline, which some complain do not go far enough in shifting the parameters so that the lowest price does not always win, this is what he had to say.

“There will always be some controversy about public procurement law. I think it [the latest law] is a step forward but I think it will be many years before we will reach the ideal state. In fact, we will never reach the ideal state, but where we will meet the quality of, say, Scandinavian governance. I think we are trying to catch up and slowly, steadily, we will get there.”

The US Chamber of Commerce in the Czech Republic has set out some pointers for what it would like to be a 60 percent growth in Czech Growth Domestic Product by 2025. One of the factors is greater emphasis on jobs that add a lot more added value than some traditional low cost manufacturing. Another is a focus on city development plans for three of the biggest Czech cities, Prague, Brno, and Ostrava.

And, finally, AmCham would like to see the Czech Republic turn the health sector and a large potential black hole in public finances into an area of opportunity given that the Czech health sector still operates fairly well and efficiently compared to the sectors in comparable Central European countries such as Slovakia, Hungary, and Poland and at much cheaper costs than in Western Europe. Mr. Nebeský again:

Photo: archive of Czech Senate
“We just believe there is opportunity because the global population started ageing even in global economies such as China, or will soon start ageing. And the ability of budgets to finance it will be quite a challenge. So innovation and R&D into this sector will be a big opportunity on a global scale and I think we have quite a good healthcare system in the Czech Republic which provides a natural competitive advantage to jumping on the train early on.”