Czechs first to achieve Western prosperity but not without growing pains

By bne IntelliNews May 5, 2008

Beth Potter in Prague -

Czechs are set to become the first citizens in all of the former Eastern bloc countries to achieve Western levels of prosperity, according to a new report out from the Organization for Economic Cooperation and Development. But that quick catch-up won't be without some serious potential growing pains, while public finance issues and a full-blown labor shortage could cause a setback.

"They have got to tackle the big issues, including health care and pensions," OECD spokesman Hemmings told bne. "Our central message to them is to carry on with the reforms they have made in public spending."

According to the OECD report released late April, the Czech Republic could close the economic gap with other EU countries within a decade, based on a growth rate of 5% per year. The small, centrally located country surpassed Portugal in terms of economic performance in 2004, the same year it entered the EU. Czech economists and bankers have pegged growth about 5% through 2010, driven, in large part, by a new Hyundai plant in Moravia-Silesia scheduled to start production at the end of 2008, and the expected increase of car exports from Hyundai and Skoda. The average gross wage stood at CZK20,399 ($992) per month late last year, according to the Czech Statistical Office.

All is not rosy, however, as the strength of the Czech crown bites into the country's export competitiveness. Politicians also continue to squabble over when to adopt the euro - now slated for 2012 at the earliest.

New EU member states also need to watch the labour situation carefully to keep things from spiraling out of control, says Ralf Wiegert, a senior economist at Global Insight consultancy. Keeping a "tighter than usual" rein on fiscal and monetary policies is especially important, to keep the economy from a "hard landing" in the future, Wiegert says. "Most important is to avoid exuberances like what we saw in the Baltics, for example, which makes for a major headache in the form of a hard landing later on."

That could be tough. Inflation is already starting to creep up, driven by one-off policy decisions, including an increase in the value-added tax rate and a flat tax on income, Hemmings says. Food and commodity prices are rising steadily. "This year and next year is the squeeze," Hemmings says. "This year, we see growth slowing down, but it will pick up in 2009, so that's not a threat."

Hard reforms

What might be harder for politicians is to carry through with unpopular public reforms. Czechs must pay nominal fees for doctor visits and drug prescriptions (CZK30 each, or less than $2) for the first time ever following a new health reform law that went into effect on January 1. Another politically painful plan to lower monthly pension amounts to the elderly - an already financially strapped age group - has been shelved.

Already, the Czech Confederation of Bohemian and Moravian Trade Unions (CMKOS), the country's largest union group with 540,000 members, and nurse and teacher groups have demonstrated against the reforms. "Keeping on track in the long term relates to demographic development and the rapid increase in the aging population in the early 2010s," Hemmings says.

While the tight labor market is also worrying, even as it boosts wages, Wiegert remains optimistic. "On the face of it, this is just a normal process in a region which had traditionally a very large wage discrepancy, but now has opened up its borders," he says.

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