Czech Minus: Grading the Republic's Economy

By Lieb, Doug | Harvard International Review, Summer 2004 | Go to article overview

Czech Minus: Grading the Republic's Economy


Lieb, Doug, Harvard International Review


The Czech Republic seems to have worked its way out of the Soviet-imposed misery that lasted through the 1980s; the state appears to have shed its dreary image of concrete housing blocks and Communist inefficiency. The Czech Republic joined NATO in 1999 and the European Union in May 2004, signifying the promise of a growing "New Europe." Czech economic indicators seem positive: real growth is steady, and foreign direct investment (FDI) is remarkably high. However, despite a few promising statistics and much optimistic rhetoric, a closer look reveals that the Czech economy has made distressingly little progress.

Even the most positive economic signs do not indicate categorical success. Growth of real gross domestic product (GDP), a hallmark of developing prosperity, is expected to rise above four percent in 2004 and has remained steady over the past decade. But real GDP growth was disappointing during the first half of 2003, barely exceeding two percent and disappointing those who had anticipated roughly four percent growth. Even this modest figure of expansion is likely overestimated, for some of it is attributable to an election-year financial stimulus package passed by the Social Democratic Party's parliamentary coalition.

Although the Czech Republic is the leading FDI recipient among European transition economies, this exceptional ability to attract foreign capital for growth also provides a misleadingly rosy picture of the state's economic situation. The distribution of foreign investment across sectors of the economy and geographic regions of the country is extremely uneven, with the northwestern region languishing far behind Prague and its environs. The Organisation for Economic Cooperation and Development (OECD) noted in its 2003 survey of the Czech Republic that inefficient and chronically unprofitable domestic industries remain prevalent in areas overlooked by foreign capital sources.

Disparity across economic sectors is particularly important in considering wages and employment in the Czech Republic. Unemployment in the first quarter of 2003 was over 10 percent, the highest percentage since 1990. On balance, wages lag far behind those in Poland, one of the most prosperous of Central European states since Soviet rule, and are instead competitive with wages in Slovakia, which is less developed. Furthermore, wages are growing much faster in the public than in the private sector. Some domestic economists have expressed concerns over the sustainability of current wage growth, arguing for diversification of wages within the public sector (that is, proportionally smaller wage increases for less skilled workers). A wage structure that overvalues unskilled workers relative to professionals reduces the monetary incentive for individuals to acquire skills through education, which may then hamper technological development and the economic growth it can facilitate.

This concern seems validated by the experiences of education and health care professionals. …

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