Czech government report highlights alarming aspects of economy

23-11-2016

Massive foreign investment has been a feature of the Czech economy over the last two decades. The upside has been fast modernisation of many companies and their integration in the world economy. The downside though is a major annual outflow of cash, mostly in the form of dividends. The government has now taken stock of the situation and is wondering how to address the problem.

Photo: archive of Czech GovernmentPhoto: archive of Czech Government Look around the Czech Republic and you will see that many of the biggest companies are in foreign hands. From the country’s biggest industrial company, carmaker Škoda Auto, to most of the big breweries, all the biggest banks, and many of the utilities, they follow a familiar pattern of ownership. And even many of the biggest Czech owned companies have foreign outposts in favourable tax locations.

The situation has now become an issue of concern for the Czech government. It has just unveiled an analysis which charts what it describes as an alarming situation. One of the biggest takeaways from the study is the fact that the level of profits outflow from the Czech Republic is twice what you would normally expect for such a developed economy. The total outflow now comes to around 200 billion to 300 billion crowns a year.

And whereas the foreign owners in the early years invested heavily into their Czech assets since 2005 the situation has changed. Instead of reinvesting their profits, existing foreign owners are increasingly repatriating the cash back home and major incoming investments are easing up.

Aleš Chmelař, photo: CEPSAleš Chmelař, photo: CEPS And while many of the foreign owned companies have been some of the fastest growing and most profitable, the high earnings of those companies are very often not reflected in the wages of the Czech workforce.

Another aspect of the analysis is the comparatively sluggish performance of the domestic owned sectors of the economy. One of the co-authors of the report, Aleš Chmelař, explains:

“As part of the analysis we also looked at the added value directly linked to foreign investment and to domestic activities and we found out quite shocking conclusions that the volume in added value in GDP of the domestically owned economy has not moved, or grown, almost at all since 1995. So in the last 20 years you don’t register any growth of the domestically owned economy and all the growth the Czech economy registered was basically linked to Foreign Direct Investment (FDI)."

The analysis is described as a means of opening up discussion on how the stem the outflow of cash and restructure the economy. But it already makes some suggestions. These include trying to boost domestic owned companies so they play a bigger role in the economy, fighting against tax havens, tougher regulation of many network companies - such as in the gas, electricity, or water sector, which are often foreign owned – new taxes, or higher wages in the big earning companies.

Chief economist with the consultancy Deloitte, David Marek, warns though that the analysis should not serve as an impetus for any hasty moves by the government.

David Marek, photo: Šárka ŠevčíkováDavid Marek, photo: Šárka Ševčíková “I think that trying to restrain investors from the possibility of paying out dividends abroad can result in the fact that any new potential investor would be afraid to invest in the Czech Republic. It’s not the best approach how to increase the attractiveness of the Czech economy.”

The report’s authors though point out that they see it more as spurring a debate on how the economy should be restructured for decades to come.

23-11-2016