The economy of the Czech Republic has grown incredibly in the last 3 decades. It is such a success story that there are several lessons other countries can learn.
- 5 Economic lessons to learn from the Czech Republic
The Czech Republic was the most prosperous economy of the communist bloc when it disintegrated over three decades ago. Still part of Czechoslovakia back then, the Czech Republic had already been an industrialized country before the Second World War.
But when the war was over it had the bad luck of ending up in the Soviet bloc. And the country paid a massive price economically, and obviously also in terms of freedoms.
In 1991, Czech nominal GDP per capita was about €2,000. To put it in perspective, Portugal and Greece’s GDP per capita were €7,000 at the time, Spain’s at €11,000 and Italy’s at €16,000.
Since the early 2020s, the Czech Republic has already overtaken Greece, is on par with Portugal, and very close to Spain and Italy. And what is even more impressive: the trend is clearly in their favor.
In fact, if instead of looking at nominal GDP, we look at real GDP, which corrects for price differences between countries and is a more reliable indicator of how productive an economy is, the Czech Republic is already as rich as Italy and Spain. And significantly richer than Portugal and Greece.
5 Economic lessons to learn from the Czech Republic
Let us see 5 lessons other countries can draw from the Czech Republic in order to improve their economy. These are things the Czech have been doing for over three decades and results speak for themselves:
1) Focus on the long-term
If there is a common denominator in most measures that the Czech Republic has implemented in the last 30 years, it has been its focus on the long-term prosperity of the country.
The Czech Republic seems to know where it wants to go. Citizens, businesses, and even the political class know that a good and sustainable standard of living is the consequence of having a prosperous economy.
An important part of that long-term plan has been not to put the country in a vulnerable situation. For example, thanks to its low public debt, the Czech Republic was one of the European countries that best weathered the economic and financial crisis that began in 2008.
As a consequence, the Czech population did not have to suffer the very high unemployment rates and stagnant wages that were seen in many European countries, especially in the South of the continent.
2) Attractive place to invest
Since the early 1990s, the Czech Republic has tried to attract as much foreign investment as possible. To achieve that, a multitude of measures were taken to liberalize the economy and provide more assurances to investors.
Some of the most important actions taken were the following:
- Massive privatizations of formerly public enterprises
- Full elimination of price controls
- Stable monetary policy
- Ensure the convertibility of its currency, the Czech Koruna, so that investors knew they were free to invest and disinvest at any time
- Strengthened rule of law to provide more legal certainty
- Reduce bureaucracy and streamline procedures
As a result, many European and North American corporations began to invest in the country. The Czech Republic remains a very attractive place to invest to this day. Coincidentally, most Southern European countries struggle to attract foreign investment.
3) Fiscal discipline
If a country wants to be an attractive place for foreign investment and enjoy a sound monetary policy, fiscal discipline is a must. And the Czech public finances are in a really good position. Czech politicians and citizens have not fallen into the debt trap. And that has immense long-term benefits.
The country has one of the lowest levels of public debt in Europe. Public debt closed 2019 at only 30.8% of GDP.
In fact, it was the first ex-Soviet country to receive an investment-grade credit rating from Standard & Poor’s. That was in 1993. Three decades later, the country’s credit rating is AA, the same as Austria and Finland.
Having its public finances in order sends a very positive message to investors. They know that the government has no need to increase taxes if revenues fall temporarily due to a recession.
Additionally, a healthy fiscal situation helps make the currency stronger. This has proven very positive for both Czech citizens and foreign investors. The Czech Koruna has been one of the very few currencies that has strengthened against the US Dollar, the Euro (and previously the Deutschmark) since the mid-1990s.
4) Industrialized economy
We have already seen that the Czech Republic has prioritized foreign investment for over three decades. If we look at the types of companies and economic sectors it has managed to attract, we will see why the economy has performed so well.
According to the CIA World Factbook, the Czech economy generates 37.5% of its value added in the manufacturing sector. Ireland and Poland are the only two EU countries that generate a higher percentage of their GDP in the industrial sector. As a comparison, the figure for Spain stands at 23.2%.
The most important sectors of the Czech economy are technology, engineering, electronics, heavy machinery, automotive, aerospace, pharmaceutical and chemical products. Within the services sector, the IT and research industries are the most prominent.
There is no doubt that the country has been able to take advantage of its strengths. If you have a highly educated population, an enviable geographical position and long-term planning, it makes sense to focus on those economic sectors that offer the highest value added.
5) Index of Economic Freedom
Finally, the Czech economy is considered very free economically, according to the ranking done by The Heritage and The Wall Street Journal. It is calculated by analyzing aspects such as bureaucracy, the legal framework, the efficiency of the country, taxation, size of its public sector, labor regulation, monetary policy, or ease of investment.
The Czech Republic is ranked 21 worldwide, ahead of countries such as the United States (25), Austria (23), Belgium (43) and Spain (51).
The Czech Republic has done things very well for over three decades. The results are beginning to be noticed. The wages its workers receive are still moderate and lower than those of Germany of France, but they have been going up steadily and the trend continues to be positive.
For readers may think the Czech success is solely attributable to the financial aid received from the European Union and its geographical position. But many other countries within Europe have benefited from those and not achieved anything remarkable.
Countries like Spain, Italy, Greece or Portugal have received billions of euros in EU money for many decades. Some of their regions still receive EU financing to this day. However, the money has mostly ended up in unproductive spending and corruption.
La República Checa tan solo ha sabido aprovechar al máximo sus oportunidades y ser paciente con su economía. Como país, sabía dónde quería estar. Y ha trabajado para ello. Personalmente, no tengo ninguna duda de que su economía estará entre las más prósperas de Europa dentro de un par de décadas. Se trata de un verdadero milagro económico. El milagro económico checo.
The Czech Republic has truly done a remarkable job. It knew what it wanted to be as a country, and they have worked very hard for it.
Personally, I have no doubt that the Czech economy will be among the most prosperous in Europe within a couple of decades. When that happens, people will speak of the Czech economic miracle.
If you liked this analysis, check out the one I did about Switzerland:
Top 10 Reasons Why Switzerland is so Rich
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