The Czech economy as an integrated periphery: The case of dependency on Germany

ABSTRACT

The Czech Republic (CZ) is a small open economy that has been integrated into the European economy predominantly through its ties to Germany. Traditional analysis has focused on the positive aspects of this process and pointed out the favorable indicators of the Czech economy, strongly influenced by a modernist perspective (model of economic development) and neoliberalism (applied economic policies). The aim of this article is a more critical reflection on some important features of the Czech economic model. The application of some currently emerging analytic instruments of international economic relations allows us to point out many problematic features of the Czech economy—in particular its dependence on foreign capital combined with a weak ability to retain it and the low added value created within the CZ. There are indicators suggesting a dependent growth within a rigid pattern of an international division of labor and wealth distribution. We argue that shortcomings of the neoliberal model of development (even) in the case of a well prepared and governed economy are a good reason to bring the insights of dependency theory back into the discussion.

KEYWORDS:

• Convergence
• Czech Republic
• dependency
• neoliberalism

JEL CLASSIFICATIONS:

• F21
• O24
• O25
• O47

Notes

¹The question is how this phenomenon is reflected in labor productivity—in terms of accounting, the margin is created in CZ but does not represent a product nor is it available to national residents. It is also important to monitor where such an increase in the value of the goods created within the Czech economy is taxed.

²The value of exports according to the national concept is obtained by subtracting foreign entities’ exports from exports according to the cross-border concept, and then adding foreign entities’ purchase of goods in the CZ. The same holds analogously for imports.

³For example, foreign entities own 50% of imported ICT goods and 68% of exports. As a consequence of this, the trade balance surplus of ICT goods in 2013 was about CZK 100 billion according to the cross-border concept, while there was a CZK 40 billion deficit according to the national concept (CSO, 2014b).

⁴According to CNB data, 60.6% of all investments went into the financial and insurance sector, 10.9% into the manufacturing industry, and 8.1% into professional, scientific and technical activities. We may assume that the larger share of German investments went into manufacturing, as the largest acquisitions of Czech banks came from Austria (Erste), Belgium (KBC), and France (Société Générale).

⁵In Western Europe, the usual rate of foreign control is about 10–20% (about 5% in Germany); in the case of Latin America, it is about 25-30% (the exception is Mexico with 82%); and in the case of China it is no more than 3-5%. In the case of the CZ, Hungary, and Slovakia it is 96%, 94% and 93% respectively (Poznańska, Poznański 2015). From total banking sector assets in CZ, 96,9% of them were the under control of foreign banks; 99% of deposits went to banks in foreign ownership. Banking sector operations were focused dominantly on the Czech economy—92% of loans and deposits were denominated in CZK (CSO 2012).

⁶Calculated as net revenues from dividends plus net revenues from reinvested earnings plus net revenues from loans.

⁷In terms of share of GDP, the primary income deficit represented 6.03% in 2014, as compared to 3.73% in 2005 and 2.23% in 2000. This indicator was higher only in Luxembourg, Kazakhstan, and Ireland.

⁸Exactly in the period starting in the mid-1980s, neoliberal economic ideas and policy objectives prevailed in the EU, which was for European economies very unusual.

⁹Gross disposable income corresponds to that income which stays in the economy after all redistributive transactions of non-residents. The gross domestic product is adjusted not only by the balance of primary incomes, as in the case of the gross national product, but also by the balance of common transfers. Therefore, this number indicates the income which residents can actually use for consumption, investment and other purposes.

¹⁰Actual individual consumption consists of goods and services actually consumed by individuals, irrespective of whether these goods and services are purchased and paid for by households, by government, or by nonprofit organizations.

Additional information

Notes on contributors

Oldřich Krpec

Oldřich Krpec is an associate professor in the Faculty of Social Studies, Department of International Relations and European Studies at Masaryk University in Brno, Czech Republic.

Vladan Hodulák

Vladan Hodulák is an assistant professor in the Faculty of Social Studies, Department of International Relations and European Studies at Masaryk University in Brno, Czech Republic.