The international competitiveness ratings show that the Czech Republic is lagging behind on many aspects. The main causes are political instability, bureaucracy and the lack of flexibility of its labour market

Months of political uncertainty, outgoing governments, technical governments, the anticipated elections, the longest recession ever faced by the Czech Republic, the corruption scandals and lack of a current policy on immigration. These are the main factors that have led to and are still causing the evident decline in competitiveness of the Czech Republic. It is not actually a dead end situation, nevertheless, lost time and ground will be difficult to recover.

Describing this gloomy situation are not the doomsayers or pessimists, but the actual figures available that, once they have been examined properly, afford a completely negative picture. The declining Czech economy in recent years has been reported on a quarterly basis. The last blow, in fact, came just as we were beginning to see the light at the end of the tunnel, when the data for the third quarter of 2013 saw an 0,1% decline in GDP (on an annual basis the decline was 1,3%), one of the worst results among the Central European Countries. Depressing percentage figures that, if added to the Country’s international competitiveness, are not very reassuring for international investors and local entrepreneurs. In actual fact, according to the “World Competitiveness Report” set up by the World Economic Forum, the Czech Republic has suffered the worst collapse in the index since this assessment tool came into existence. During the past year, it lost seven positions, ending up in 46th place.

PIL competitività

According to the World Bank’s “Doing business” ranking, Prague actually ranks in 75th position, against Poland in 45th place and its Slovakian neighbouring cousin in 49th position. Very negative figures which show that the need for an immediate and clear strategy and political stability are still more ineluctable. The master-father Miloš Zeman will not be suffice in maintaining the helm straight and the new government – if stable – will have to roll up its sleeves and build on the ideas laid down in the 2012-2020 “Strategy for International Competitiveness”, set up by the previous government, which had defined the objectives to bring the Czech Republic into the top twenty in global competitiveness.

But what is damaging Prague? According to many economists, the main issues that are blocking the Country are the instability and lack of credibility of Czech politics, combined with the complications of doing business. Pavel Mertlík, the former finance minister and rector of the private Banking Institute has thus explained the drop in the WEF index: “The ranking is based on 12 separate indicators. We are in 86th place as far as competitiveness is concerned, but in terms of political credibility we are in 146th position with only Lebanon and Argentina in a worse position. Credibility is something that can be lost over night, but is difficult to recover”.

However, apart from problems related to policy and credibility, the Czech Republic could also suffer directly from the indicator results that monitor many international rankings: first of all the loss of direct foreign investment. Troubling investors, in fact, are the complex procedures for setting up a business in the Czech Republic, which are still considered burdensome and also the lack of an immigration policy to facilitate entry of foreign workers. On this particular topic, the president of the Czech Manufacturers Association, Jaroslav Hanák, has recently expressed harsh criticism towards the last governments: “How is it that, in the Internet age and the automation of the public administration, one has to wait weeks or even months to start a trading company or business here”. This was echoed by vice-president Radek Špicar: “Getting permission to allow a foreign manager to work in this Country – an Indian national for example – means that a Czech company has to initiate a lengthy procedure that may go on for months, even years, while in a country like Germany, it can be resolved within a few weeks”.

Positions also shared by economists, who have also indicated the weakness of internal demand and decreasing investments and lack of stability. According to the business daily Hospodářské noviny, unlike Poland and Germany, “the Czech Republic is not able to prove to be an area of stability, but rather, one of great frustration – and this is not normal if you consider the economic traditions and potentiality that this Country could have”. Besides the well known and long-lasting recession affecting the Czech Republic, there is also the “negative” aspect, common to all Western economies: the aging of the population and therefore of its workforce. Meanwhile, there is a reduction in the impetus of the so-called “Husák children”, the generations born in the seventies and eighties. According to Tomáš Fiala, an expert on demographics at the Higher School of Economics in Prague, in the next 15 years the number of middle-aged people at work will drop by 10%. And this takes us back to the immigration issue: a more flexible policy could help the Czech labour market.

But what can Prague actually do to get out of this vicious circle? Perhaps it will be enough to implement the tools that are already at hand. A good starting point was afforded by the previous government with its “Strategy on competitiveness”, which contains simple rules and warns of the dangers of deviating from this path. “The potential risks of a lack in the competitiveness of its institutions – says the document – could bring about a rise in corruption and reduce productivity. This would bring about a worsening in services and public spending. As regards infrastructures, any passive approach would destroy the competitive advantages enjoyed by the Czech Republic thanks to its geographical position in central Europe: if the Country is not linked to Europe by means of suitable infrastructures, trade and investment will just go the other way”. The Strategy dots the “i’s” also on education and on the possible long-term damage if the necessary investments are not put in place. “The goal – the text continues – is to prepare the younger generation to face a dynamic and globalized world. Education will have to focus on teaching flexibility”.

by Daniela Mogavero