Corruption has economic consequences

Transparency International (TI) ranked the Czech Republic 53rd out of 178 countries on its annual Corruption Perceptions Index for 2010. Values range between zero and 10, with higher scores indicating lower levels of corruption. The Czech Republic received an index value of 4.6 - about the same as South Africa.

Compared with last year, the Czech Republic was down 0.3 points. Between 2002 and 2008, the country improved its index from 3.7 to 5.2, but dropped to 4.9 in 2009, and the trend continues.

There is a strong and direct negative correlation between the level of corruption in the country and the volume of foreign direct investment (FDI).

In the Czech Republic, for the entire year 2009, FDI fell by more than half to 52.2 billion Kč from 110.1 billion Kč a year earlier, accompanied by the aforementioned 0.3 drop on the index. The inflow of FDI into the Czech Republic this year is better, but only at first glance. In the first half of the year, FDI was 80.2 billion Kč, according to the Industry and Trade Ministry.

This appears promising; however, based on ministry statistics, the largest amounts came from reinvested profits and collections of repaid loans previously granted by foreign parent companies. In terms of actual new capital in the first half of this year, the total was only 6.9 billion Kč, again paired with the increased perception of corruption.

The Czech Republic has long been too economically dependent on the assembly of automobiles and electronics and needs to attract global capital to spur innovative industries. A shift like this, then, spurs Czech companies to invest in other emerging economies. This leads to a dynamic economy, integrated with and flexible to international conditions.

Under the current corruption trend, "smart people are replaced by people who can be trusted," says Charles University sociologist Pavol Frič.

"A corrupt system depends on trust, and it is better to work with foolish but trusted sources rather than intelligent ones, about whose loyalty [one] doubts," he adds.

Reduced investor interest in the Czech Republic is also driven by frequent changes to already confusing laws, poor law enforcement, and a lack of transparency in government decision-making and the judiciary. Even domestic investors are not keen on investing in the Czech Republic, according to conversations with a pair of analysts.

The Czech Republic needs an innovative economy to attract global capital and in turn move its own profits back onto the international market, but this can't happen if the country continues to be perceived as corrupt. It is a classic Catch-22: The best way to deter corruption is to integrate into international markets and their standards, but one can't attract the capital from these markets if domestic society is perceived as corrupt.

Further confusing the problem, a survey this year by the GfK, one of the world's largest market research companies, revealed that Czech people are resigned to leaving the fight against corruption to the state. At the same time, however, people don't believe state officials will actually fight corruption.

- The author is a corruption expert and works for the Police Academy of the Czech Republic.

Aleš Pachmann can be reached at
features@praguepost.com