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Czech Economy-

by on 14/07/2013

Edward hi, let me please add some details to your informative articles about Czech economy.

The demography of Europe as the whole and Eastern Europe in particular influences the economic performance, you are very right. Once I quoted in my blog the following;

“Demographic problems rise when a population grows to the point where there are too many children to feed or when it declines and there are too many old people to be taken care of. But I know of no country that its demographic situation is balanced. A largely elder population is a problem if they enjoy a pension system based on deficit; a young population is a problem if the country lacks the resources to educate them.”

If to compare the demographic situation in countries like Czech Republic and Israel, it is like an economic laboratory. While in Czech Republic the population is stable, and it also happens due to enormous increase in life expectancy by almost 10 years!!!, since the fall of the Communistic regime, in Israel is high natural growth of the population and with it relatively young population. While I assume the education level of these two countries is comparable, their economic dynamics is not. Yes Europe’s economic problems are very much a result of its demographic changes, but also of mentality of “leisure” in Czech Republic, compared to mentality of alertness that prevails in Israel and probably in US also. The aging society is not only problem of statistics and deficit in the pension system; it is also a problem of national mentality. I am not expert on this sociological-psychological phenomenon, and probably there have been done researches in the academy on the subject. (If not it could be a great subject for economic-sociological-psychological research, to find out how the economic, social and psychological behavior differs in a society with growing young population, compared to an aging society.)
To be practical, Czech Republic and Europe as whole, has to do something about the demographic development. Since I don’t see change in birth rates, the only solution is immigration. The mine problem with immigration is that if the immigrants come from very different cultural, social and political background, immigration endangers the social and political structure of Europe. So the solution is immigration from countries with relatively similar background. The only candidates for it are the population from Russia, Ukraine, Belarus or other post Soviet countries. Of course their population is also on process of demographic depletion, but this process seems to me irreversible.

You mentioned the interesting phenomena, that the Czech economy runs a very healthy trade surplus, yet negative income flows on the current account. This is caused by large scale foreign ownership of the Czech Economy. This phenomena was caused by unsuccessful coupon privatization, initiated in the nineties, that brought the bankruptcy of the whole economic system in 1996 and later take over of most of the economic activity by foreigners. When these foreign mother companies started to take their Czech daughter companies profits home, and reduced the new investments into them, the current account became negative. In the one hand it causes depletion of the currency reserves, but on the other hand it weakens the Czech Krone and helps to increase the exports. It could not happened if Czech Republic would have Euro as its currency.

The main reason for the negative economic growth in Czech Republic is its government policy of austerity, which included increase on VAT tax on housings and public budget cuts. This policy was implemented due to wish of the conservative government to reduce the public deficit to 3% from the GDP, (EU policy not taken seriously by any other country since 2008) . To me this policy seems inappropriate, since the public dept in Czech Republic is less than 40%. If to reduce the public deficit, it would be more appropriate to do it through economic grow, but it cant be done with increasing domestic demand, because as rightly mentioned the strong propensity of the people for savings.

Czech Republic, if compared to other East European countries, has relatively good infrastructure, still a lot to be done to achieve the West European standard. If there is a wish to change the negative trend in economic growth, Czech Republic has the chance to use the opportunity of decreased demand and increase investments in infrastructure. The roads, railways, etc. are still in shameful shape and due to geographic location in the heart of the EU, investment in these facilities could have long term positive economic effect.

It seems obvious that in the following years the P.I.I.G.S. countries will have to reduce significantly their public and private expenses. This will reduce strongly the demand in EU, since they represent almost quarter of the EU population. Without demand can’t be achieved the so needed economic growth in EU, unless this demand will come from some other place. The most reasonable source of increasing demand within EU can come only from countries with relatively low debt and potentially high perspective of economic growth. And i am not speaking about Germany, Scandinavia or Holland, but rather the Eastern European countries, with about same population as the P.I.I.G.S. countries, that on one hand have relatively low public dept, mostly bellow 50%, (except of Hungary), on the other hand in spite of being part of the European Union, have shamefully low standard of living and big deficit in infrastructure. For some unclear reason the governments in these countries are cutting the investments and expenses too. It is time Brussels initiate change of this policy and allocate financial resources, released from expected reduction of consumption in the P.I.I.G.S. countries, into investments in Eastern European countries. I am pretty sure, it is not only socially correct, but compared to any other alternatives; it could bring the highest yield on investment and long term positive economic growth. If implemented on large scale, this policy could bring the so crucially needed economic growth to the whole EU zone.

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