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Keeping focus

Or how businesses need good policy, not turf wars
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February 28th, 2007 issue

By Weston Stacy
Two weeks ago, the Industry and Trade Ministry proposed a regulatory change that would have placed foreign chambers of commerce under the control of the Economic Chamber, a key nongovernmental business advocacy organization in the Czech Republic that had pushed for the change. Facing strong opposition from foreign chambers of commerce, the ministry has since withdrawn the amendment, but officials say they’d still like to change how foreign chambers are governed. Currently, the ministry approves chambers, and most chambers, as private organizations, believe that is all the state supervision necessary.
The Economic Chamber has been trying to make membership mandatory for several years. This desire has been the primary feature of its lobbying activities, and, earlier this month, spurred its attempt to revoke the independent status of all foreign chambers of commerce and make them its fully controlled subsidiaries.
Trying to clear the field of competition and make all business join its union did not work under previous Civic Democratic Party or Social Democrat governments. It is not likely to get to or through Parliament this time either. However, the proposal, made earlier this week, emerged from one of those policy crossroads that make veering off in unexpected directions — or ending up in the ditch — a worrying possibility.
It is becoming clearer day-by-day that the Czech Republic’s longtime economic policy needs modification. Centered around investment incentives for manufacturing and strategic service centers, the policy has been a remarkable success. So successful, in fact, that skilled technical workers, the primary Czech competitive advantage, are becoming scarce, and, as manufacturers line up outside recruitment agencies, the cost of that workforce is rising to tilt basic production and assembly over into the industrial parks of Romania and Bulgaria.
Local firms, usually with tighter payscales, are also being squeezed by rising labor costs, and their margins eroded. Furthermore, these local firms, again with some notable exceptions, are just reaching the capital capacity to invest at the levels that would make them eligible for incentive tax breaks. If you were sitting in their boardrooms, you could certainly understand why they would feel a specific victim of policy that has been manifestly for the public good.
In economic policy, there are two ways to handle the complaints of those who feel they have not been the beneficiaries of legislation: craft laws that create protective shells around those companies or simplify policy so that those companies with the talent and determination to succeed can succeed.
At the moment, there is a fierce battle over which path to take. The Economic Chamber believes that, together with the Industry and Trade Ministry, it should strictly regulate who can do business and how they can do it. Others say Czech companies would actually benefit more from a simplified, less centralized environment.
What no one argues is that, to thrive, Czech companies need two things: affordable capital and competitive new products. Access to capital is getting much better, but there is still an absence of capital for the garage startups that, in the United States, became companies like Hewlett-Packard. Although the government can chastise banks for not moving into that area, the truth is that this sort of high-risk business is not really bank business. It is for successful entrepreneurs and managers who understand this kind of risk better and for family members and the new business owners themselves.
These individuals need to be able to accumulate the savings necessary to invest into new businesses. The current tax structure strangles just this type of middle-class investor. Social taxes need to be capped and income tax rates and bands adjusted to fit today’s reality. If not, the country will remain dependent on foreign capital, whether in the form of multinationals or institutional investment or European Union subsidies.
Czech golden hands will be handcuffed without this capital and without new rules to stimulate investment into research and development. The current rules were written with new, foreign investors in mind. To receive government incentives, companies have to restructure their operations and institute costly administrative procedures. Because of this, many companies operating here choose not to apply. This is a shame.
Big, multinational firms with a strong commitment to the country should be encouraged to expand that commitment by moving their high-wage research jobs here. And companies such as ČEZ and Zentiva, which are the logical choices to form the core of a research-based economy, should not have to perform organizational contortions simply to get innovative new products on the market. That is why enhanced tax deductability for applied research projects makes a great deal of sense.
Sense and emotion constitute the two approaches to today’s policy debate. Emotion will guide us into silly turf wars, and thus into greater political economic patronage and counterproductive legislation.
We should be careful to distinguish between envy and pride. Pride is when Czech companies and entrepreneurs, like Rosický in soccer and Záhrobská in skiing, become the best at what they do in the world. The potential is obviously there, but will only be achieved if we create an open and competitive environment that encourages, not limits, opportunity.
While we would object to the Economic Chamber trying to manipulate legislation to put a stranglehold on the voice of business, we would gladly follow their leadership in fixing the tax and incentive system so that Czech golden hands produce more gold in Czech pockets.
The author is executive director of the American Chamber of Commerce.


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