4.3 Economic profile of the Czech Republic
4.3.1 International trade
The Czech Republic is a small and very open economy. International trade is, therefore, crucial for healthy economic performance and ever growing living standard of Czech citizens. Czech foreign trade is closely connected with the EU. According to the Unicredit bank Report on Czech International trade,in 2017, 90.2 % of Czech export went to Europe and 83. 7 % of export went to the EU. Import is characterized by similar numbers: 72.1 % of all imports came from Europe, 65.7 % of total imports came from the EU.( Pour, 2018). Below follows the chart of the 15 most significant trading partners in terms of Czech export. The chart shows data from 2018 and it is worth noting that the structure of trading partners has not changed significantly over the last 2 decades.
Figure 4.1 Top 15 export destinations of the Czech Republic
Source: Worldstopexport, 2019
Top trading partners in term of Czech export (2018)
Germany
37
Far biggest trading partner of the Czech Republic is Germany. Export to Germany represents more than 32 % of total exports. This figure is given mainly by the car industry. Car production is the most important sector in the Czech industry. Other significant trading partners are Slovakia, Poland, France and the UK.
The following chart shows the share of international trade on Czech GDP. Both volume of trade and positive trade balance have been ever increasing – for example in 2004 total export was equal to 46 % of Czech GDP, in 2017 it was more than 67 %. This increasing trend points to the openness of Czech economy. Authors of the earlier-mentioned report warns that open economy means greater involvement into global supply chain and, therefore, better access to new technologies and faster growing productivity, but on the other hand, the economy is more sensitive to economic shocks.
(Ibis, 2018)
Figure 4.2 Share of international trade on Czech GDP
Source: Unicredit Bank Report on International Trade Trade balance
38
Structure of Czech export tend to change only very slowly. In the last 10 years, the structure has been following: 85 % of Czech export consists from 3 main groups:
machines and transport vehicles (57 %), market products sorted by used materials (15%) and industrial consumer goods (11%). Czech industry and international trade are closely tied with car industry and related supply chain. The report (Ibis, 2018) says that car industry and related business contribute to the Czech GDP by 13 %. If the automobile industry suddenly disappear, Czech GDP would shrink about 13 % which means it would be back on the 2012 GDP level.
Figure 4.3 Significance of industries in Czech GDP
Sourse: Unicredit Bank Report on International Trade
This chart presents the industries that contribute most to the Czech GDP. Data shows that the main industry is the transport vehicles industry, followed by machinery and electrical devices. It is clear that the Czech industry as a whole is dominated by traditional industries and unfortunately, new/modern industries are clearly underrepresented.
Significance of industries in Czech GDP (incl.indirect effects)
Transport vehicles
39 4.3.2. Gross Domestic Product (GDP)
In 2005, the Czech government approved its historically first economic strategy, The Strategy for Economic Growth of the Czech Republic 2005-2013. The document´s objective was to navigate the country towards knowledge-based economy with growing living standard and high rates of employment (Mejstřík, 2011). The goal of the strategy was to bring the Czech Republic closer to the economic level of developed European countries while respecting the principles of sustainable growth. Specifically, it aimed to reach the average EU GDP per capita till 2013.
Table 4.5 GDP per capita in PPS, Index (EU28 = 100)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
GDP per capita in PPS (%)
EU (28) Czechia Slovakia
40
The aim to reach average EU GDP per capita was not met. To achieve the required level, the Czech economy must grow faster than the EU´s economy. The graph shows great progress that Slovakia has made since 2004. In 2017, its GDP per capita was about 17 percentage points closer the EU average GDP. The Czech Republic improved its position about 11 percentage points. The starting position of Slovakia was worse compared to the Czechia, but it happened to grow more rapidly in the later years.
Convergence is built on GDP growth. Therefore, it is essential to understand the dynamics with which both economies grew in the last few years. In the following graph, we can see GDP growth rates of Slovakia, Czech Republic and EU. The graph shows that Slovakia grew steeply from 2004 till 2007. In 2009, all three economies experienced massive collapse of their performance. It can be interpreted as the aftermath of the global economic crisis that hit the USA in 2007 – 2008 and spilled over to other parts of the world.
Figure 4.5 GDP growth rate Source: Eurostat
-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
GDP growth rate
European Union - 28 countries Czechia Slovakia
41 Table 4.6 GDP growth rates (%)
Source: Eurostat
The country did not reach its goal in 2013 and even 4 years later in 2017 the goal still was not reached. We can also see the significant economic slowdown after the economic crisis in 2009. Czech Republic improved about 10 percentage points within 11 years, from 2006 – 2017.
The few first years in the EU were very positive when it comes to economic growth.
The country enjoyed inflow of foreign direct investments and, also benefitted from joining the common market. In 2009, the country was hit by global economic crisis.
GDP growth rate fell by 7,5 percentage points compared to the previous year.
According to Czech Statistical Bureau, it was mainly caused by the collapse of international demand that came as the aftermath of the financial and economic crisis that hit the USA in 2007-2008.(CSU, 2015)
According to the Ministry of Industry and Trade´s Analysis 2012, in 2011 -2012, the Czech economy was still not fully recovered from the global crisis. Fiscal consolidation ordered by European governments while facing the debt crisis, strongly effected the economic activity. The impact could be seen in households spending patterns but also in shrinking of the international trade. The economic slow-down spread from periphery of the EU to the very core of eurozone.(MPO, 2013)
The Czech economy showed signs of recovery in 2010 but a year later, started to slow down again and in 2012, the decrease continued. The above-mentioned analysis states, that this recession lasted much longer than the previous one in 2009 which was, according to the report, gone in 3 quarters. The Czech environment was affected by negative sentiments in the society. Along with the ongoing debt crisis in the
42
eurozone, there were also domestic factors, such as austerity measures implemented by the Czech government, lower income of households and growing uncertainty in the labour market. All these factors resulted in growing concerns about future economic development by both general public and companies which reduced their spending even more.
In the next couple of years, we can see solid economic recovery. In 2015, we can even see 5,3 % growth of economy compared to the previous year. It was the highest growth in the entire research period and, according to the main economist of ING Bank Seidel, this economic boom was mainly given by using up all the available EU budget funding before the start of a new budget period. He also pointed that the growth in 2017 of 4,5 % was much more healthy and organic. It was driven by both international demand and domestic consumption. He warned that this growth may not be sustainable and predicted that the economy would slow down in the following years. (ČT, 2018)
4.3.3. National savings
According to the Strategic Competitiveness Framework Report, prepared by advisory team of Czech government, the traditional macroeconomic indicators must be seen in greater economic context. The report says that Greece can serve as a negative example. Many of Greece´s indexes showed good performance, but its gross savings were far below EU´s average. Therefore, the next chart shows how the Czech Republic is performing in the field of gross saving. (Vlada, 2018)
43
Figure 4.6 Savings as % of GDP Source: World Bank
If the country lacks its own savings, both the private and public sectors must borrow money for economic growth. Convergence statistics in this case are strongly distorted and must be accompanied by other indicators. Growth that is not based on own savings but on external borrowing is not sustainable for our country. High levels of debts not only have negative impact on economy but it also sends bad signals to potential investors that could lead to reduction of foreign direct investments and lower competitive ability of a country.
From this point of view, the Czech Republic is performing very well (Strategic competitiveness framework, 2011). The national savings are far above European average. The report concludes that It is therefore necessary to maintain an environment where the private sector will continue to save and the public sector will not form public deficits in the long term.
44 4.3.4 Productivity
Productivity is another indicator that is commonly used to describe competitiveness. It influences competitiveness on domestic companies in international markets. It has impact on many other factors, such as GDP growth, living standard of citizens, etc.
Table 4.7 Real labour productivity per person (Index, 2010=100)
Source: Eurostat
Figure 4.7 Real Labour productivity per person Source: Eurostat
Slovakia is performing better than the Czech Republic. Over the research period, Slovakia was able to improve its competitiveness about 34.4 percentage points. The Czech Republic improved its position on 24,3 percentage points. The Report says that while neighbouring countries, such as Slovakia, are shifting employment into high productivity sectors and rapidly converging through technological and structural
0.0 20.0 40.0 60.0 80.0 100.0 120.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Real labour productivity per person
European Union - 28 countries Czechia Slovakia
GEO/TIME 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 European
Union - 28
countries 96.7 97.7 99.3 100.5 99.9 97.3 100.0 101.6 101.6 102.2 102.9 104.2 104.9 105.9 106.5 Czechia 87.1 91.1 96.0 99.3 99.8 96.8 100.0 102.1 100.8 100.0 102.2 106.1 107.0 109.9 111.4 Slovakia 78.4 82.4 87.5 95.0 97.2 93.8 100.0 101.0 102.6 105.0 106.4 108.7 109.5 110.5 112.8
45
changes, Czech´s productivity growth is slowing down. The report also warns that it is not sustainable.
4.3.4 Global competitive reports (GCR)
In the next few paragraphs, Czech competitiveness´s position will be described based on the analysis of the World Economic forum and its Global competitiveness report. It compares macroeconomic competitiveness based on multi-criteria index that combines hard data and soft data together. The Index has 12 pillars and analyzes country´s progress in every one and each pillar. The Czech Republic holds steadily its position around 30th most competitive country in the world. In 2019, the country ended up on 29th position.
Figure 4.8 CR and SR: Global Competitiveness Report, 2006-2007 Source: WEF. Global Competitiveness Report, 2006 – 2007.
0 2 4 6 Institution8
Infrastructure
Macroeconomy
Health and Primary…
Higher Education…
Market efficiency Technological…
Business…
Innovations
Global Competitiveness Report 2006 - 2007
Czech Republic Slovakia
46
Figure 4.9 CR and SR: Global Competitiveness Report, 2017 – 2018 Source: WEF. Global Competitiveness Report, 2017-2018.
The two schemes present the progress that both countries made between 2006 and 2017. In 2006, the performance in respective pillars were very similar in both countries.
Both achieved very high score in health and primary education, but were falling behind their European neighbours in the fields of Innovation, Institutions and Infrastructure. In 2017-2018 report, the Czech Republic is performing better in most indicators. One can see great progress in macroeconomy, higher education, goods market efficiency and labour market. However, it would be fair to add that this scheme does not reflect structural changes made by Slovakia and the pace of their convergence to the EU that was very high.
0 2 4 6 Institution8
Infrastructure Macroeconomy
Health and Primary…
Higher Education…
Goods martet…
Labour market…
Financial Markets…
Technological…
Market size Business…
Innovation
Global Competitiveness Report 2017 - 2018
Czech Republic Slovakia
47
Figure 4.10 Pillars value change between 2006-2007 and 2017-2018 Source: WEF. Global Competitiveness Reports 2006-7 and 2017-18.
Figure 4.10 summarizes changes in the respective pillars between 2006 and 2018.
Great progress can be seen in the macroeocnomic pillar. It confirms the results of the previous subchapter – which shows that the Czech Republic is doing very well in terms of growing international trade, GDP rate, National savings, Productivity, etc.
Another category that improved significantly is Technological readiness. This stands for the quantity of technologies that have been used during the production process. In this regard, it is worth mentioning the Industry 4.0 (Průmysl 4.0). This concept was introduced by Germany in Hanover in 2013 and it introduces the idea of 4th industrial revolution. It is step forward in industrial development that is built on the idea of turning current factories into smart factories. It should be achieved by using IoT, IA, smart technologies with the goal to completely modernize the entire production process. The goal is to achieve a strong customization of products under the conditions of highly flexible production. (MPO, 2016)
The Ministry of Industry and Trade prepared an analytical document that is trying to describe, analyze and summarize all advantages and impacts of introducing the new generation of production process in the Czech Republic. It is a long and very complex
-0.6-0.4 -0.20.20.40.60.81.21.41.601
Institution Infrastructure Macroeconomy Health and Primary Education Higher Education and Trainin Technological Readiness Business Sophistication Innovations
1 2 3 4 5 7 8 9
Pillars change between 2006-2007 and
2017-2018
48
analysis that predicts that full introduction of Industry 4.0 would be a game changer not only for Czech industry but for the entire society. The document mentions the Readiness index prepared by company Roland Berger that identifies the Czech Republic as “traditional”. It means that the country enjoys its solid industrial base but has not moved the industry into the new industrial era. The greatest advantage of this initiative would be increase of productivity. The downside would be probable rise of unemployment – as 24 % of all employed people in the Czech Republic work in industry (Ibis, 2016).
Another pillar that has improved (but remains problematic, though) over the past decade are institutions. Institution represents mainly state administration. The institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate wealth. The role of institutions goes beyond the legal framework. Global Competitiveness Report from 2017 – 2018 provide an insight into what areas are perceived as the most problematic:
Diversion of public funds, public trust in politicians, favorism in decisions of government officials, efficiency of government spending, burden of government regulation and finally efficiency of legal framework in challenging regulations.(Global Competitiveness Report, 2018) In the last couple of years, the Czech government has taken steps to modernize state administration and make it more interconnected. There are also projects for digitalization of strate administration, project for proceeding in e-Government and initiatives to reduce / eliminate corruption in the system.
Limited progress can be seen in the field of Infrastructure. Well-developed infrastructure reduces the effect on distance between regions, integrating the national market and connecting it at low cost to markets in other countries and regions.
Telecommunication network is also part of this pillar. High quality internet connection allows for a rapid and free flow of information which increases overall economic efficiency by helping to ensure that businesses can communicate, and decisions are made by economic actors who take into account all available relevant information. The progress in this pillar is given mainly by improved telecommunication networks coverage. As digital agenda is one the Europe 2020 flagship, the Czech government
49
prepared a strategic initiative called Digital Czechia (Program Digitální Česko, 2019).
The goal of this program is not only achieving better digitalization of the country and proceed in the project called e-Government, but also define and articulate country´s position to various digital issues on EU level. The program is meant to be a cross-sectional document that will touch many areas and industries. All the initiatives seem to be right because institution and areas related to institutions have been subject of criticism, both on domestic and international level.
Figure 4.11 points directly to the most problematic factors for doing business in the Czech Republic. The biggest obstacle seems to be tax regulation. Taxation is often criticized for lacking simplicity and for being a subject of constant changes which can lead to additional costs for companies. Another negative factor is Inefficient government bureaucracy – factors such as quality of state administration, transparency in dealing with public property, speed of judicial process, open-business costs and time needed, etc. fall into this category. Another problematic factor is corruption. Most of these weaknesses belong under the institutions framework.
Figure 4.11 Most problematic factors of doing business
Source: Global competitive report 2018
50
Figure 4.12 Competitiveness profile of the Czech Republic (compared with Europe and North America)
Source: Global Competitiveness Report 2018
This picture illustrates competitiveness profile of the Czech Republic compared with the average competitive performance of Europe and North America. Taking into consideration that Czech Republic is compared with the most developed region in the world, its performance seems to be very good. Macroeconomic environment and financial market are outstanding. On the other hand, pillars that falling behind the Europe and North America region are Innovations, Infrastructure, and Institutions
51 4.4
SWOT Analysis
4.4.1 Strengths
According to the SWOT analysis theory, strength is something that can be found in internal environment of the organization and, at the same time, adds value to the entity. Should this definition be followed, one can identify Czech republic´s strengths as:
• Strong macroeconomic environment
• Technological Readiness
• Financial Markets
• Health and primary education
Strong macroeconomic environment
At this place we should briefly revisit the economic indicators that were mentioned earlier in this chapter. The Czech economy seems to be very healthy. Over the last two decades, volume of trade and positive trade balance have been growing steadily.
It proves the openness of the Czech economy. An easy access to new technologies and transfer of technologies might be seen as the positive side effect of the openness of Czech economy.
Economic growth accelerated significantly in the last few years. Current unemployment rate is the lowest recorded in any EU Member State since 2002. Real GDP increased by 4.5 % in 2017 and keeps growing by around 3 % in 2018 and 2019.
The European Semester Country Report 2018 says that “whilst the Czech economy continues its shift towards more knowledge-intensive activities, several bottle necks still hamper the R&D system”. These included emerging shortages of skilled human resources, the low level of public-private cooperation and relatively low performance of the public science base. While foreign R&D funding is trending upwards, domestic firms reduced their R&D spending. (European Commission, 2018)
52
The previous analysis showed very good levels of gross savings where Czech Republic is performing better than the EU. Even productivity has been growing steadily. The intensity of growth, however, could be higher. Slovakia was performing much better in this area due to investments into value added industries and structural reforms. This should serve as a source of inspiration for the Czech Republic.
Technological Readiness
Czech Republic has made a great progress in the area of Technological Readiness.
This stands for the quantity of technologies that have been used during the production process. As was already mentioned above, Czechia has a small open economy which is a condition that supports easy transfer of technologies. Czech government approved the Industry 4.0 initiative. The program encourages industrial development and its very goal is to turn current factories into smart factories: by using IoT, IA, smart technologies with the goal to completely modernize the entire production process. The Ministry of Industry and Trade prepared an analytical document that is trying to describe, analyze and summarize all advantages and impacts of introducing the new generation of production process.
Financial Market
The European semester document reports that the Czech banking system is highly
The European semester document reports that the Czech banking system is highly