Czechs head Central Europe's catch-up quartet in race for Western riches

Czechs head Central Europe's catch-up quartet in race for Western riches
By Chris Johnstone AFP - Sunday, April 27 04:45 am

PRAGUE (AFP) - Czechs are in pole position to overturn decades of post-war economic decline and stagnation to become the first citizens of a former Communist bloc country to attain Western levels of prosperity.

Catch-up with the West can be achieved within a decade, according to the latest upbeat report on the Central European country published by the 30-strong OECD this week.

"The gap could close within a decade," the Organisation for Economic Cooperation and Development predicted.

That step, coming after the Czech Republic overtook Portugal's economic performance in 2004, the same year it entered the European Union, would be a landmark for a country that was an economic powerhouse on the level of Belgium before WWII but slipped into relative decline behind the iron curtain.

The OECD scenario for Czechs to have the same purchasing power as the average consumer in the 15-member eurozone by 2018 is based on sustained growth of 5.0 percent a year for the small, export-oriented country.

The level in Western countries lags behind at 2.0 percent.

Many local analysts see that scenario as entirely plausible, give or take a year or two, although most are hesitant about supporting such sustained, high growth for the Czech economy given current global uncertainty.

"We see convergence in around 2021 to 2022," Patria Finance analyst Tomas Vlk told AFP, adding that Czech economic growth would likely fall to 3.0-3.5 percent in 2009 before climbing to around 4.0 percent.

"It is a very possible scenario," added Raiffeisenbank analyst Ales Michl. He said the key factor fueling growth was fact that local companies are ploughing back their profits as investments at record levels rather than distributing them to shareholders.

The investment total reached around 125 billion koruna (4.99 billion euros, 7.95 billion dollars) in 2007 and is set to rise even further this year, based on figures drawn from the Czech National Bank, he said.

"Investments are a lot higher than dividends and that is the real factor for future growth," Michl added.

Vlk says Czech momentum was fueled by a massive influx of foreign investment that started around 2000 and was boosted by a wave of major privatisations.

While Czechs head the race for convergence with the West, GDP per person in the country of just 10.2 million is already 75 percent of the eurozone average, neighbours Poland and Slovakia are also closing the gap.

Only Hungary, whose leftist government is trying to pare back a ballooning public deficit with measures that have curbed economic growth, is heading in the opposite direction, according to an OECD report on the country released in April.

Slovakia, profiting from economic reforms and a wave of foreign investment that earned it the description "tiger economy," overtook Hungary in 2006 for second place among Central European catch-up economies.

Slovakia's GDP growth came to just under 60 percent of the EU-15, with Poland occupying last place at around half the average level of the rich Western countries at the end of 2006, according to the OECD report.

Whether Slovakia, which is already bidding to beat its neighbours by switching to the euro at the start of 2009, can also beat the Czech Republic by being first to catch up with the West is a moot point with analysts and experts.

The Slovak economy grew by 10.4 percent last year compared with the Czech Republic's 6.5 percent, according to figures from national statistics offices.

"Slovakia has been growing quicker than the Czech Republic but it has been coming from a lower base," pointed out OECD country expert, David Carey.

"The closer convergence comes with West European economies the slower the growth is likely to be. You just can not count on annual productivity growth of 4-5 percent until full catch-up is achieved," he added.