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Low Added Value

The Visegrad Four’s failure to invest in innovation doesn’t bode well for the future.

by Martin Ehl 26 June 2012

While the Czech Republic and Slovakia slide away from the principle of a flat income tax for individuals, the Hungarians have been promoting such a tax as one of the preconditions for growth. After the changes in 1989, Slovakia, Hungary, and the Czech Republic built their economic policies on attracting foreign investment, while Poland relied more on unsatisfied domestic demand and the domestic sector in general by not immediately privatizing all its enterprises. 

 

These are just two examples of the varying approaches to economic policy and long-term development in Central Europe.


At a time when a Europe-wide debate has been taking place on the basic idea of combining such varied countries as Greece and the Netherlands into one economic unit with a single currency, it’s worth taking a look at the four Visegrad countries. What do they actually have in common economically, and what are the basic differences (besides Poland’s sheer size)?  


The Hungarian economist Zoltan Pogatsa helped me come up with some answers. Pogatsa gave a very interesting lecture last week at a conference on the economic future of the Visegrad area and didn’t spare his criticism of the political elite or others in his analysis of the bleak prospects for our economies.

 

“If you constantly reduce the size of the state and with it the collection of taxes, then you don’t have the money that should be invested into changes in the economy that produce higher added value,” Pogatsa said, referencing the Czech Republic, Slovakia, and Poland. Unlike Hungary, those countries are not wallowing in debt but are still cutting spending and increasing taxes. 

 

Pogatsa cited two contradictory principles that could also be applied to the current debate on the future of the eurozone: 1) You cannot live beyond your means, and 2) Only money creates new money in the business world, the same as with the state. In general, how to balance these two principles is a key question for the future of (Central) Europe. 

 

A typical example is investment in science and research. In the Western world 
two thirds of such investments are from private sources and only a third from the state. In the Visegrad Four, with the exception of the Czech Republic, it’s almost exclusively the state that pumps money into these areas. And even the Czechs fall well behind Western Europe on R&D spending as a share of gross domestic product. According to the OECD, the Czech figure is 1.42 percent of GDP, compared to 0.94 percent for Hungary, 0.57 percent for Poland, and 0.51 percent for Slovakia. The average for the 15 older EU countries is 1.86 percent.


Pogatsa’s colleague on the panel, Polish economist Adam Ambroziak, added that what matters is not just net investment into research and development, but also the overall approach to innovation, and the (in)ability to apply innovation in practice. The general political pressure that we see now in both the Czech Republic and Slovakia to return to vocational education raises concerns that our economies won’t be too innovative in the future, if politicians prefer cheap labor forces to the creation of added value. 

 

The only major competitive advantage of the post-communist countries of Central Europe remains their low wages. But, as Pogatsa stressed, instead of the planned gradual convergence on the European average wage, which is now 27 euros per hour, wages in these parts are rather diverging from those in Western countries. The best of the four is the Czech Republic at 10 euros per hour. 

 

According to Pogatsa, the basic goal of bringing the new member states economically closer to Western Europe has simply not been successful – even though billions in European funds have flowed to the east. But the structure of the economies, based on cheap labor and low added value, is largely unchanged. That does not bode well for the future. The only thing that Pogatsa still finds surprising is the Czech Republic’s relatively low unemployment rate, even though the country has the least mobile workforce of the Visegrad Four.


I found a single bright light in this grim vision of the economic future. During a different debate on the future of the eurozone, Georg Milbradt, former prime minister of Saxony and a leading German economist, claimed that Poland and the Czech Republic, with their ties to the German economy, belong to the core of European Union more than some other countries that use the euro. However, even there, it’s again mainly due to cheap labor, not because of a plethora of ideas and innovation. 

Martin Ehl is the foreign editor of the Czech daily Hospodarske noviny, where this column originally appeared. He tweets at @MartinCZV4EU.
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