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May 12th, 2008
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A new education formula

With no more training wheels, will the economy wobble?
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May 7th, 2008 issue

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By Weston Stacey
For the past decade, the Czech formula for economic growth has been simple: Combine the available pool of qualified and competitively priced talent and proximity to developed European markets with a transparent system of investment incentives to attract foreign capital and business acumen.
It was a simple formula, perhaps, but one that produced outstanding results.
Since 1997, the country’s gross domestic product has increased 78 percent. Even with the high level of job reductions from privatization and domestic restructuring, unemployment barely budged: the jobless rate slid up from 4.7 percent to 5.3 percent. At the same time, average real wages increased 39 percent.
These numbers clearly show that the incentive-based policy delivered a balanced economic growth that benefited the country, companies and the work force.
No economic formula works forever, however.
Most successful policies eventually sow the seeds of their own obsolescence. For incentives, this happened with surprising suddenness. Even before some of the great triumphs of the incentive period have started production, the greenfield and brownfield developments that have taken root throughout the countryside are finding it hard to fill their work shifts. Companies are discovering that the upward pressures on wages are straining the business models upon which investments were based.
Companies sitting in Brno’s bulging high-tech industrial parks are discovering that the number of information technology students graduating from local universities cannot meet the demand.
Big manufacturing facilities south of town are facing shortages of trained technical workers. Some are even talking about importing workers on a massive scale.
The same is true in Ostrava. Three years ago, local politicians were worried pale over the dwindling supply of jobs in the mining and steel sector.
Now, with major investments such as GE Money’s service center and Briggs & Stratton’s engine factory and the resurrection of Tatra just outside of town, the fear is that Hyundai’s new auto plant will dry up labor supply to the point that companies will need to import workers from Poland, Slovakia and points east.
When the government revised the incentive package last week, it acknowledged this reality.
By abolishing incentives for a wide range of manufacturing investments, the Industry and Trade Ministry has, in effect, eliminated the only remaining component of the old economic formula.
Is there a new formula set to slide into its place?
An outline is becoming visible. The government would like the Czech Republic of tomorrow to rely more on its quicksilver heads than its golden hands. It wants the country not only to make but to create the new products and services of tomorrow.
This is the right goal, and now is the right time to pursue it. Achieving it, however, will not be easy, and will require focusing on education and research as the most important factors of the country’s new formula.
Prime Minister Mirek Topolánek has already recognized that the old ways of allocating research spending will not achieve the type of results the government requires.
Working with the Research and Development Council, Topolánek has crafted a new policy for public research spending, which should concentrate the country’s talent into centers of excellence, instead of ineffectively spreading the spending to satisfy the political demands of each region.
By putting all the money into fewer pots, the prime minister is encouraging the best minds to congregate together to spur the creativity that can only be sustained by a community of scientists working in competitive concert.
If the economy is to be driven by its minds, the government must put its money where its mouth is. Teacher and professor pay must rise to competitive European levels. The current political focus on building new academic centers with EU funding is understandable, but no Nobel Prize has ever been awarded for modern classrooms.
Czech officials should set a new goal to concentrate Europe’s — and the world’s — best and most creative minds at its universities, and then encourage its leading companies to establish well-endowed chairs that will attract them.
Finally, universities should actively recruit the best student talent of Central Europe so that Czech minds are honed in competition with the best minds of this region. A system of scholarships for top foreign students, which again could be fully or partially funded by private donations, could be established.
If the country could then provide good opportunities to these foreign graduates, the Czech Republic could benefit from their economic contribution as much as the United States benefited from the number of Asian students who graduated from U.S. universities and built world-class U.S. companies.
These three factors are obviously only a part of the more complex formula the government must construct to build an economy that offers opportunities to all its citizens.
Other parts of the formula will include enhancing its strength in mechanical engineering (particularly in the Ostrava region), matching its tourist potential with world-class infrastructure, finding a way to export its splendid artistic endeavors, and offering continuing education so that its population can adapt more effectively to changes in the economic environment.
The next five years will be the most challenging time in this country’s modern development. The successful governing policy of the past decade has constructed a strong economic base on which the government and businesses can build.
This work, however, will be more intricate, and rely on a formula with more moving parts. Coordinating and sustaining these parts will take inspired leadership and effective administration.
By eliminating investment incentives last week, the Czech government took the training wheels off of the economy. Its next moves will determine if we continue to move forward without a wobble.
— The author is the executive director of the American Chamber of Commerce in the Czech Republic.


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[23:45 09/05/2008] : >>These numbers clearly show that the incentive-based policy delivered a balanced economic growth that benefited the country, companies and the work force.

You argument makes no sense. How do you know if the Czech economy would have expanded more quickly, more slowly or at exactly the same pace without these incentives? You have a data point of one, with no controls.
Margot Winston
Prague
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