4.3 Economic profile of the Czech Republic
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)
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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
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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
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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
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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
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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
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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
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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)
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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 bank-centered. Bank hold 74 % of the system´s total assests and 84 % of total capital.
The Czech banking sector generally shows high levels of capitalisation, profitability and liquidity. Banks' capital adequacy ratio) appears to provide sufficient room for credit financing of the real economy. The current period of favourable profitability developments provides an opportunity to raise the capitalisation of the banking sector.
Banks were operating with the second-highest return on equity of the EU-28 in mid-2017. Capitalisation ratios have increased slightly over the past seven years, but because they improved more rapidly in the rest of EU, capital levels in the Czech banking system are now around the EU average.
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The Czech capital market is thin compared to similar-sized economies. The overall trade value of shares, debt securities, structured products and investment funds was 16.2 % of GDP in 2016. Despite the household saving rate being the third highest in the EU and annual saving in the economy exceeding the market capitalisation of the Prague Stock Exchange, the ability to turn these into equity and long-term debt financing is limited. (European Commission, 2018).
Health and primary education
Health and primary education are both very accessible for general public. There is a Czech national health care systém that has been in place for decades. This systém provides health care and most of the medication for free or with very limited involvement from the side of patients. Primary, secondary and university education are all state-funded. There have been large discussion to change this systém, though.
4.4.2 Weakness
• Institutions
• Infrastructure
• Innovations
Institutions
According to international organizations, Czech Republic is not performing well in the term of Institutions. Good institutions are necessary for functional and competitive country. Public bodies should fully support entrepreneurship and business. One of the problems on the field of institution is the overall improvement of efficiency of 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,
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burden of government regulation and finally efficiency of legal framework in challenging regulations.(World Economic Forum, 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 state administration, project for proceeding in e-Government and initiatives to reduce / eliminate corruption in the system.
Also fighting corruption is yet another area that needs to be significantly improved.
Government adopted Action Plan for Fighting Corruption. One of the suggested solutions is to proceed in digitalization of public affairs and make decision-making transparent and all information accessible for general public.
Infrastructure
Infrastructure is very important for country´s competitiveness. From the point of view of the Czech Republic, it is crucial especially due to the geographic location of the country. From the perspective of GCR, into this category falls not only physical infrastructure, but also information and telecommunication networks and their coverage. Czech Republic is falling behind Western Europe especially in the area of quality of roads and highways. Certain parts of national highways seem to be under reconstruction almost permanently. The EU is involved in improving physical infrastructure on its territory. Therefore, there are funds that are available for modernisation roads or highways corridors.
In the field of information and telecommunication network, there is project called
“Digital Czechia”. The aim is to bring the Czech Republic closer to the “Information society”. The government will support high speed internet connection and the overall digitalization of the country.
55 Innovation
Czech Republic should belong to the group of countries that are already driven by innovation. However, in this case innovation seem to be rather slow. The GCR points to low demand for innovation from both businesses and public sectors. Another reason seems to be low transfer of knowledge between Research and Development and business sector. (World Economic Forum, 2018)
This year, the government prepared a new plan called Innovation strategy for the Czech republic 2019 – 2030. This project seems to be very courageous as the government wants to attract not only innovative talents but also open new research centers and platforms that will operate in this field. It should have intersectional character.The main pillars of this program are: Polytechnical education, Support for national start-ups and spin off projects, Digital Czechia, Smart investments and Research centres, etc.
The document follows Summary Innovation Index and aims to reach the “Strong Innovators” category till 2025 and till 2030 reach the status of Innovation Leaders. This initiative is also reaction to Europe 2020 strategy that invites all member states to increase budget available for R&D. (Rada pro výzkum, vývoj a inovace, 2019)
4.4.3 Opportunities
Opportunities usually lie in the external environment and represent a change that can lead to advantage. From this perspective the main opportunities might be:
• Building new smart/modern industries
• Vision – to create and have a greater vision for Czech economy orientation
• To fully embrace the Europe 2020 strategy and make sure that all available sources and funds provided by the Union are used up and used up effectively
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• Diversifying trading partners and start being more focused on fast developing regions outside of Europe (Asia, Africa, South America)
Building new/smart industries
One of the great opportunities that the Czech Republic has is to build new smart industries that would be able to generate great value added and, also allow fast transfer of knowledge and technologies. As it was shown in the subchapter dedicated to international trade, the current Czech industry relies heavily on automobile industry, related services and some metal manufacturing. The entire composition of the industry seem to be quite “old-fashined”. The Readiness index “labelled” the Czech Republic as traditional industrial country. It means a country that has managed to build quality industry but has not made the step towards future by incorporating new technologies and upgrading the single processes to the whole new level.
The Industry Initiative 4.0 seems to be the perfect chance to transform Czech industry into new modern sustainable system. It is built on using digitalization of production process with the help of Internet of Things, Artificial intelligence, transfer and accessibility of information, cloud computing and collecting big data. The impact of introducing this initiative would be vast. Likely, it will not touch only the industry itself but will spill over other areas, such as education, R&D, IT services, consulting and labour market. It also has the potential to attract new sectors, businesses and talents.
It will be a long process but Czech government should not hesitate to take actions immediately.
Vision
Czech government should create a vision for Czech economy. In the political field, Czech Republic used to have the label of a country that fights for human rights and freedoms. It was usually referred to Havel´s legacy and the concept of love and justice.
Czech government should create a vision for Czech economy. In the political field, Czech Republic used to have the label of a country that fights for human rights and freedoms. It was usually referred to Havel´s legacy and the concept of love and justice.