Reklama
 
Blog | Pavel Čejka

Will the Czech Republic Retain its “Swiss Status”? The Battle against Corruption

“Power does not corrupt. Fear corrupts... perhaps the fear of a loss of power.” -  John Steinbeck

Original Study published for „Burgas Free University Jubilee Book“

Introduction

Twenty years after the fall of communism the Czech Republic (CR) is, by some, recognized as the Switzerland of Eastern Europe (Czech Press Agency, 2011) due to its strong economic growth over past 15 years. Splitting with Slovakia from what used to be known as Czechoslovakia, Czechs gained significant economical momentum as they inherited most of the industrial centers of the formal country (Janackova, 1994). Although a member of the EU, Czech retained its own currency, which provided good cushion in first wave of the recession experienced in 2009 (Spevacek, 2010). Moreover its low depth to GDP remained (under 40%) in 2005-2007 which combined with GDP growth 6-8% provided Czech Republic good starting position for the Financial Chrisis to come in 2009. Despite being a “rising star” among its CEE counterparts, there are several critical factors which if unaddressed will lead to hard fall of this CEE country. Corruption, which ranks CR next to Poland and South Africa (Transparency International, 2009),  unbalanced macroeconomic tilt towards exports with a strong dependence on industrial demand (Spevacek, 2010), aging population (Czech Statistical Office , 2010), are major concerns for CR. Those factors will strongly determine whether Czech will maintain its exclusive status among post-communists countries. Let us have a look on how those trends will shape this country within the next 15 years.

The CR and the recent trends

Origins of Czech in various forms dates back to sixth century AD to Samo’s Land. Czechs has been part of European Culture, however with problems to establish own state, due to limited number of inhabitants. Czech king Charles the IV become emperor of West Roman Empire in 14th century and established first German speaking university in the World (Charles University, 1348 in Prague). With its bound to Germanic culture and manufacturing excellence Czech stayed part of the Austrian-Hungarian empire till its collapse in 1918 (Capka, 1998). After, Czechoslovakia was formed and soon become well recognized engineering powerhouse of 20’s and 30’s. However in 1938 the UK and France let their ally fall into Hitler’s hands. Paradoxically, Czech Skoda’s factories were what Hitler wanted; 60% of war machinery was produced there in early days of battle of Britain (The World at War, 2000). After the war Czech was decided to become part of Soviet controlled lands, which influenced life of Czech People for next 60 and maybe more years. The first uprising against communism was suppressed in 1968, second one, 30 years later set Czech to way of democracy yet again.

Reklama

Economically, Czech quickly picked up breathtakingly and in past 20 years skyrocketed to 80% of average GDP PPP of EU; while Prague was ranked as 5th the richest EU region (EUobserver, 2010). The Czech Economy enjoyed low impact from the Financial crisis in 2009 due to savings, a well secured banking sector; low foreign debt (39% of GDP); and cushion of local currency (Spevacek, 2011). This gained the trust of investors, enabling CR to attract a majority of the FDI across the CEE region (EuroWeek, 2011), reflected in its recent promotion by S&P to AA- category; into the 1st league on the level of Japan or China (Marsh, 2011). However, GDP still decreased by 4,2% in 2010 (Spevacek, 2010). Being strongly export oriented, with 84% of its activity aimed on EU business partners, Czech is among the most interdependent economies (Spevacek, 2011).

The demographics of the CR follow the general trend of the Western civilisation: aging. Although population numbers seems stationary (at 10 million inhabitants), there is a significant growth of people aged 65+ compared to fertility rates. Such trend will have a significant impact on the future population of the CR. Czech Statistical Office expects (2009) the Czech population to shrink by 18% by 2050. The number of Czechs aged in their 20’s will drop from today’s 40% to 19% by 2050 (Babecky & Dybczak, 2010).

Czechs are of Slavic ethnicity, but Austrian culturally(Hofstede, 1984). Following Hofstede’s model (1984) which is mostly used for cultural assessment in social science (Soares et al., 2007) Czech is:

1: A high-power distance culture; follows rules and respecting social hierarchy.

2: Tries to avoid the unknown; takes few risks; and is rather slow in implementing innovative solutions; also tends to be bureaucratic

3: Success and status are more important for Czechs than quality of life.

4: People tend to be individualists unless given competencies.

Not only Hofstede’s dimensions shall be considered, but influence of post-communist culture too. Klicperova et. al (1997) identified symptoms of post-communist culture such as corruption, ethnic nationalism; rudeness and apathy to immorality. Katchanovski (2000) reveals that out of post-soviet-bloc countries with Western culture (e.g. Czech) tend to show better economic performance. He also points out that the level of corruption plays a significant role in such a performance. Corruption emerges as people believe that government cannot be help to their problems (Katchanovski, 2000).

The current situation in the CR represents the highest risk its citizens. Czech is frequently criticised for its level of corruption and bureaucracy. Crises warned the CR early, as corruption and red-tape act as high economically-political risks (Rose-Ackerman, 1976). Among the post-communist countries however it still holds one of the best positions. Nevertheless, impact of the post-communist culture on the society is broad. 

The “Eastern Switzerland” seems to be well aware of its economic power as it is aware of its corruption. A new political party supposedly based on “anti-corruption” led to the election of a new right-wing government. Unfortunately little or no progress was made to fight it. And he new party proved to be perhaps more corrupt that the old one. Apathy in addressing the corruption issue by action has been recently noticed by investors and US corporations. This may result in FDI outflow from Czech (Czech TV, 2011; Czech News, 2011). There is a general agreement in the literature that corruption causes severe economical consequences 1] lowers attractiveness of FDI (Woo, 2010), 2] increases shadow economy (Virta, 2010),  3] forces banks to exercises extra caution in lending to SMEs (Weill, 2011), and so slows down business development (Emerson, 2006; Aidt, 2009; Everharta et al., 2009). Salinas-Jimenez & Salinas-Jimenez, (2007)states that corruption usually emerges in countries with low capacitates and state competences; however this is not the case of the Czech Republic, which gets constantly ranked as a country with the most developed state capacity (Fortine, 2010). On the other hand, as suggested by (Jain, 2001) corruption usually appears in countries with a high level of bureaucracy. This is culturally rooted in Czech society (Hofstede, 1984). Among the new EU members, the corruption level is twice as high as among original members (Jain, 2001). The same authors also support the idea that economic wealth has an impact on corruption. Consequently, reforms are important to cut down red-tape, nepotism and dishonesty.

As demonstrated above, corruption has a direct impact on economic performance of a country (Everharta et al., 2009). However is there also any impact of the economy on the level of the corruption? Czech Republic reports inconsistent data: improvement of corruption index in the years of prosperity, but in recent years of the crisis it suddenly dropped back to where it was ten years ago. Statistical analysis was implemented to test whether there is relationship in between the level of the corruption on the GDP growth. As illustrated by the graph bellow there is positive correlation in between GDP growth and level of corruption. In other words, the higher the GDP growth, the lower the corruption in Czech. Such findings can help us to elaborate on the future trends in Czech.

Future Trends

The Czech Republic due to its size and the structure of its economy cannot actively drive the international financial situation, as it relies on export of industrial goods, mainly within EU (Spevacek, 2010). Culture shapes people’s minds and cannot be easily “re-programmed”(Hofstede, 1984). Nevertheless, the younger generation of Czechs (15 years old) rejects post-communist syndrome theorem (Klicperova et al., 1997) . It will however, take 15 years before those students can rule, and bearing in mind demographical trend, Czech will remain with post-communist syndrome for next 15 years. Corruption in Czech will be influenced by economic development in EU and Global markets. The combination of all those factors will hit CR multiply, as lower economic performance increases corruption which then decreases economic output. Although the younger generation shall bring justice, due to demographic trends it is likely for the old guards stay within their position longer and thus slow down the penetration of new ideologies, which follows cultural characteristics of the CR suggested by Hofstede (1984).

Economically, Czech is to follow growth cycle of the EU, Russia and the US. Due to recent economical development, the Eurozone just lowered its economic prognosis, and so did CR. Consequently a simple model (see Figure 2) was suggested to explain mutually interdependent demographic-economic-corruption trends in Czech for next 15 years. This model incorporates the level of corruption, GDP growth and external factors influencing the outcome of the Czech Economy in 2011-2025. The speed of rotation of such corruption affected economic performance depends upon:

1: Internal factors such as the speed of a new generation penetrating old structures and the aging of the population; and

2: External factors such as economical condition of trading partners, EU legislation, etc. Linear regression curve (see Figure 1) supports model suggested bellow.

 

It could be concluded from the model that all the critical factors are interconnected, and must be assessed accordingly.

Positive or negative trend either external or internal influencing one part of the system magnifies the effects on other parts. To break out of this cycle strong economic performance, easing corruption, and giving a free hand to the younger generation to fight corruption is needed. Strong EU regulation and its enforcement may drive the change as well.

Conclusion

The Czech Republic enjoyed an economic boom and international recognition as a “Switzerland” among post-communist countries. Such achievement was mainly reached due to external factors and the economic growth of its EU neighbours. When looking deeper it was identified that Czech failed to fight post-communist syndrome and especially corruption during the years of the prosperity. Reciprocal correlation between growth of GDP and corruption was identified. In a time of economic hardship, corruption will grow and create further impact on economic performance. Fuelled by negative demographic trends, it will take a longer time before a new generation of Czech sets new moral and ethical standards, or EU legislation is implemented. No matter how long it takes before the World recovers from the financial crisis, one is certain: To retain its status, living standard and competitiveness, corruption must be extirpated. Consequently Czech is likely to lose its “Swiss-ness” as its post-communist moral paradigm still prevails, thanks to the old guard being in power. Global economic recovery is therefore expected to be the necessary driving factor of a paradigm shift toward a future with lower level of corruption.

 

 

Bibliography

Aidt, T.S., 2009. Corruption, institutions and economic development. Oxford Review of Economic Policy.

Amnesty International, 2011. Amnesty International Annual Report 2011. [Online] Available at: Amnesty International, Amnesty International Annual Report 2011 – Czech Republic, 13 Mhttp://www.unhcr.org/refworld/docid/4dce15725.html [Accessed 23 November 2011].

Babecky, J. & Dybczak, K., 2010. The Impact of Population Ageing on the Czech Economy. Working paper. Prague: Czech National Bank Czech National Bank.

Capka, F., 1998. Dejiny zemi Koruny ceske v datech. Prague: LIBRI.

Czech News, 2011. Corruption: Czech economy’s hidden and growing problem. [Online] Available at: http://aktualne.centrum.cz/czechnews/clanek.phtml?id=722489 [Accessed 23 November 2011].

Czech Press Agency, 2011. Business News. [Online] Available at: http://byznys.ihned.cz/c1-52990450-cesko-je-uchazecem-o-titul-svycarsko-vychodni-evropy-rika-cnbc [Accessed 24 November 2011].

Czech Statistical Office , 2010. Population and vital statistics: numbers. Year Book. Prague: Czech Statistical Office Czech Statistical Office.

Czech Statistical Office, 2009. Demograficke zmeny a environmentalni vyvoj. Prague: Czech Statistical Office.

Czech Statistical Office, 2011. Czech Statistical Office. [Online] Available at: http://www.czso.cz/eng/redakce.nsf/i/macroeconomic_indicators/$File/56462167.xls [Accessed 10 November 2011].

Czech TV, 2011. Financial Times: Korupce v Cesku ohrozuje investice. [Online] Available at: http://www.ceskatelevize.cz/ct24/svet/154062-korupce-v-cesku-ohrozuje-investice/ [Accessed 22 November 2011].

Emerson, P.M., 2006. Corruption, competition and democracy. Journal of Develpment Economics.

EUobserver, 2010. Prague outranks Paris and Stockholm among EU’s richest regions. [Online] Available at: http://euobserver.com/886/29502 [Accessed 24 November 2011].

EuroWeek, 2011. After speedy recovery CEE looks ahead with confidence. [Online] Available at: http://www.euroweek.com/SpecialReportsArticle.aspx?IssueID=73883&ArticleID=2358482&isAsia=&p=5 [Accessed 24 November 2011].

Everharta, S.S., Vazquezb, J.M. & McNabc, R.M., 2009. Corruption, governence, investment and growth in emerging markets. Applied Economics, pp.1579-94.

Fortine, J., 2010. A tool to evaluate state capacity in post-communist countries, 1989–2006. European Journal of Political Research, pp.654-86.

Ghauri, P. & Grønhaug, K., 2002. Research methods in business studies : a practical guide. 2nd ed. Harlow [etc.] : Financial Times Prentice Hall.

Hofstede, G., 1984. Culture’s consequences : international differences in work-related values. Abridged Edition ed. Beverly Hills: Sage Publications.

Jain, A., 2001. Corruption: A review. Journal of Economic Surveys.

Janackova, S., 1994. Selected Issues of Monetary Policy in the Czech Republic. Prague: Czech National Bank Czech National Bank.

Katchanovski, I., 2000. Divergence in Growth in Post-Communist Countries. Public Policy, pp.55-81.

Klicperova, M., Feierabend, I.K. & Hofstetter, C.R., 1997. In the Search for a Post-Communist Syndrome: A Theoretical Framework and Empirical Assessment. Journal of Community & Applied Social Psychology, 7(1), pp.39-52.

Lalountas, D.A., Manolas, G.A. & Ioannis, V.S., 2011. Corruption, Globalisation and Development: How Are These Three Phenomena Related?. Journal of Policy Modeling, 33(4), pp.636-48.

Marsh, A., 2011. Czech political upgrade – a one-off. [Online] Available at: http://tilt.ft.com/#!posts/2011-08/28846/czech-political-upgrade-one-off-2 [Accessed 23 November 2011].

Rajeev, K., Budak, G. & Budak, J., 2006. Corruption in Transition Economies: Effects of Government Size, Country Size and Economic Reforms. Journal of Economics and Finance, 30(2).

Rose-Ackerman, 1976. Corruption A study in Political Economy. New Heaven: Academic Press.

Salinas-Jimenez, M.M. & Salinas-Jimenez, J., 2007. Corruption, efficiency and productivity in OECD countries. Journal of Policy Modeling.

Samuelson, P. & Nordhaus, W., 2009. Economics. 19th ed. Irwin: McGraw-Hill.

Sedlacek, D., 2011. Economics of Good and Evil. New York: Oxford University Press.

Soares, A.M., Farhangmehr, M. & Shoham, A., 2007. Hofstede’s dimensions of culture in international marketing studies. Journal of BUsiness Research, pp.277-84.

Spevacek, V., 2010. Pozvolne oziveni ceske ekonomiky. Ekonomicke listy, pp.3-17.

Spevacek, V., 2010. Recese ceske ekonomiky a jeji makroekonomicke souvislosti. Ekonomicke listy, pp.3-13.

Spevacek, V., 2011. Makroekonomicka nerovnovaha- vazny problem svetove ekonomiky. Ekonomicke listy, pp.3-17.

The World at War. 2000. [DVD] UK: Pearson Televion International.

Transparency International, 2004. Corruption Perceptions Index 2004. [Online] Available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2004 [Accessed 21 November 2011].

Transparency International, 2005. Transparency International Corruption Perceptions Index 2005. [Online] Available at: http://www.transparency.org/news_room/in_focus/2005/cpi_2005#cpi [Accessed 15 November 2011].

Transparency International, 2006. CPI Table. [Online] Available at: http://www.transparency.org/news_room/in_focus/2006/cpi_2006/cpi_table [Accessed 14 November 2011].

Transparency International, 2007. CPI Country Table. [Online] Available at: http://www.transparency.org/news_room/in_focus/2007/cpi_2007/cpi_2007_table [Accessed 15 November 2011].

Transparency International, 2008. CPI Report 2008. [Online] Available at: http://www.transparency.org/news_room/in_focus/2008/cpi2008/cpi_2008_table [Accessed 13 November 2011].

Transparency International, 2009. Corruption Perception Index. [Online] Available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table [Accessed 23 November 2011].

Transparency International, 2009. Corruption Perceptions Index 2009. [Online] Available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table [Accessed 12 November 2011].

Transparency International, 2010. http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results. [Online] Available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results [Accessed 19 November 2011].

Virta, H., 2010. The linkage between corruption and shadow economy size: does geography matter. Journal of Development Issues, 9(1), pp.4-24.

Weill, L., 2011. How corruption affects bank lending in Russia. Economic Systems, 35(2), pp.230-43.

Woo, J.Y., 2010. The Impact of Corruption on a Country’s FDI Attractiveness: A Panel Data Analysis, 1984-2004. Journal of International and Area Studies, 17(2), pp.71-91.

 

[