Is the Czech Republic about to price itself out of the FDI market?
A recent industrial dispute at carmaker Skoda Auto - one of the Czech Republic's largest and most successful firms - has not only made headline news in this country, but also taken up many column inches in the international press. A pay rise of just under 13 percent, which Skoda workers managed to negotiate with their employer, has led to speculation abroad that the Czech Republic may be about to price itself out of the foreign investment market.
Jana Kasparova, a spokeswoman for the Czech-Moravian Confederation of Trade Unions strongly rejects this speculation. She thinks the reports of spiralling wage costs in the Czech Republic have been overplayed:
"The figure of 13 percent is of course actually only 6 percent because we have to divide it out over two years. And naturally 6 percent is not being sought in every firm, but only in businesses where productivity is high and which are profitable. It's not excessive by any means. I know that the unions are represented on Skoda's Supervisory Board and that they also have their own economic experts. Consequently, they are very well aware of the economic situation of the parent company. I don't think that unions in the Czech Republic have ever asked for such an extreme or large increase in wages that it would damage the firm. Essentially, this has never happened in any company in the Czech Republic since the Velvet Revolution."
The director of investment and applied research at the state investment agency CzechInvest, Alexandra Rudysarová, believes the peaceful and rather rapid conclusion to the Skoda dispute actually demonstrates how stable labour relations are in the Czech Republic, which is one of the reasons why the country is currently so attractive to investors:
"I think it's a good example of the willing climate [that exists here]. It proves that our trade unions are both able and allowed to discuss and negotiate the things that seem to be problematic. In the end they have reached an agreement, which I think is very strong and a good signal for all investors."
There are some, however, including Czech president Vaclav Klaus, who have expressed concern that the outcome of the Skoda dispute will encourage workers from other less profitable companies to push for similar wage increases, which their employers cannot afford. This could then jeopardise the Czech Republic's reputation for having a stable economic climate with relatively low wage costs, which has made it a magnet for foreign investment:
Such fears are badly misplaced according to Jana Kasparova:
"On the one hand it's quite unusual for the president to intervene in a collective bargaining dispute between a private firm and unions; on the other hand this sort of strike has already happened with the railways and it didn't somehow inspire unions to unreasonable wage demands. Once again I repeat that the unions have their own experts and they know what a firm can afford. Their demands are never excessive. For example, in many firms they only negotiate over employee benefits and not higher wages."
Ms Kasparova also thinks that media speculation concerning rising wage costs in the Czech Republic is ignoring the fact that cheap labour is no longer the country's main selling point when it comes to attracting investment:
"I think looking to cheap labour for a comparative advantage in the Czech economy is a throwback to the past. I don't think this country deserves this. It might have been the case at the start of the 1990s. Investors that now come to the Czech Republic are coming for its skilled and qualified labour. We've just got our third automobile plant because this country has a very strong industrial tradition. I think it's very important for investors to have a qualified and skilled labour force not just a cheap one".
Economic analyst Tomas Sedlacek agrees with Jana Kasparova that the Czech Republic is no longer simply a place that attracts FDI because of its low labour costs. In fact, he says the situation at the Skoda Auto plant encapsulates the developments that have taken place in the Czech economy since the Velvet Revolution:
"The Skoda car - as most of the listeners, I'm quite sure, remember - used to be a very lousy car. Very few people in the West would buy a Skoda because it was such a low-quality car. It was a cheap car but it wasn't a spectacular car like it is today. All those years ago, we knew that we had to compete with price. So we then produced a medium-quality car that was very, very cheap. That's how we broke into the market and that's how we made our living so to speak in the first decade of our transformation. But we couldn't have lingered in this position for a long time, so after a while Skoda used the cushion of low wages to make the Skoda into a very good and quite expensive car. It's now a standard car that nobody can be ashamed of driving on the streets. But it's no longer cheap. It's a car that has managed to position itself very well on Western markets and that's exactly what we would like to see the Czech Republic doing as well."
CzechInvest director Alexandra Rudysarova also feels that there are more important factors besides labour costs which should keep foreign investment flowing into the country:
"The first thing we can offer to investors is our skilled labour force, then our [high level of] education and European mentality, our good infrastructure and of course our geographical position - we are in the heart of Europe, which I think is very important for many investors."
Tomas Sedlacek feels that, as time goes by, the Czech economy could follow the lead of countries like Ireland and Denmark, whose stable economic climates and highly skilled workforces mean that they continue to attract massive amounts of investment despite having some of the highest wage levels in the European Union.
"That's exactly where we want to move from - from very low-value added work to high-value added work. It's a good thing that the market works that way as well. We cannot linger in this niche of simply screwing people's cars together and putting components together. That's something that we wouldn't be happy with in five years and in fact we even couldn't be because this wave of cheap production will thankfully move eastwards or to other countries."
Besides car-making, other sectors where Czech industry could really establish itself on the global market include aerospace technology and computer software and hardware.
These sectors naturally require highly skilled workers and low labour costs are not the first priority for employers in these industries. Despite rapidly rising wages, Czechs salaries are still about one fifth of what they are in Western Europe. This has raised fears in some quarters that the development of the Czech economy could suffer a "brain drain" as highly qualified workers abandon the country for higher wages in other EU countries.
Making reference to the works of JRR Tolkien, Tomas Sedlacek does not think there is much danger of this happening in the Czech Republic for cultural reasons:
"We've not seen a huge outflow of brains. We owe this to one simple fact - Czechs do not like to move much. Our labour mobility is very low. We're quite happy living in our "Shire" so to speak. We are like hobbits. We don't like to involve ourselves in the issues of the great magicians. We're quite content here in our little Shire."