CZECH ECONOMIC GROWTH IN THE CONTEXT OF NATIONAL ACCOUNTS Jakub Fischer, Jaroslav Sixta

1. Foreword The power of Czech economy has been on the increase since the year 2000 but in the first quarter of 2006, the magical growth of 7 % was conquered. Growth of 7.4 % means the best performance of the economy in the modern Czech history. Of course, the figures on gross domestic product (GDP) pleased both government officials and public. But on the other hand, what do these figures exactly mean? Analysts, officials and journalists focus on GDP and they very rarely consider the whole impact on the economy. Gross domestic product is the most important indicator of national accounts but this indicator tells us only how much is produced within the economic area. It does not tell us anything about the distribution of benefits of growth. These benefits consist of wages and profits. That is why that reliable analysis requires also other aggregates. Besides GDP, national accounts offer aggregates that take these flows into account – national income1 and disposable income. It is quite difficult to measure the benefits from economic growth in modern linked world. This is not only the case of the Czech Republic, Poland, Slovakia and other central European countries but this can be found also in old EU member countries. A good example is Ireland, originally undeveloped country in 1970’s and now one of the richest countries in the EU according to GDP. Foreign investments that flowed to Ireland totally changed the country. The same situation is running now in central Europe. The massive inflow of foreign investments (mainly from the automotive industry) is changing the power and structure of economies. The key question is who will benefit from it. The answer depends on the ratio between GDP and gross national income (GNI) that shows the share of wealth remaining in the country. Profits, which are natural aims of foreign investors, are transferred to the countries of their origin. Moreover wages that are paid to the increasing number of foreign workers flow abroad. The result is that GDP rose more than GNI. This process is inevitable because without foreign investments the countries in central Europe would have stagnated on the level of communist era. The tough fight for foreign investments in Europe led not only the Czech Republic to generous investment incentives. We accept their necessity. But we only would like to show the differences between GDP and GNI and remind that there are also other aggregates that in analyses should be taken into account. The basic definitions of main aggregates of national accounts are provided in following section.

2 Theory Gross domestic product is usually defined as a total market value of all final goods and services produced or provided within a given economic area during given period of time. From this point of view we can consider GDP as a sum of gross value added of individual producers of goods and providers of services. Secondly, we can express GDP from the expenditures side, i.e. as a sum of expenditures on final consumption and on gross capital formation plus the value of export of goods and services minus the value of import of goods and services. Finally, using the income approach we can consider GDP as a source of income, which is consequently distributed and redistributed and after those and other transactions is used for financing final consumption and investments. This approach is unjustly neglected in analyses, maybe because the Czech Statistical Office (producer of data on national accounts) uses the income approach for GDP estimates as a complementary method. Quarterly data on income distribution and redistribution at constant prices are not at a disposal. However, this does not reduce an importance of this way of the analysis. 1

National income (and therefore disposable national income) may be expressed gross and net (after the deduction of consumption of fixed capital – see [5]).

Following the consequence of accounts from the point of view of individual residential institutional sectors, we can get the gross value added as a difference between the value of production and the value of intermediate consumption. After subtracting compensation of employees (labour costs), taxes on production and imports less subsidies and property incomes (capital costs), and adding property incomes from our capital, we get primary income. We obtain disposable income by adjusting this balance for current taxes on income, social transfers and other current transfers. Disposable income is used for financing expenditures on final consumption. Savings are computed as a difference between disposable income and expenditures on final consumption and they are used (after adjustment of the balance of capital transfers) for financing of gross capital formation including changes in inventories. From the point of view of the national economy (we can consider it as an aggregate of individual sectors) it is quite similar. However, most of transactions are realised within residential sectors and have no influence to the national economy as a whole. From the value of GDP we have to subtract compensations of employees and property incomes paid to non-residential employees and proprietors (interests from foreign loans, dividends to foreign investors etc.) and add compensations of our residential employees and property incomes received from abroad. Then we get gross national income (GNI), which is consequently adjusted for the balance of current transfers and as a gross national disposable income and it is used for financing of final consumption and investments.

3. Economic Growth in Central Europe The countries in central Europe felt 1990’s very differently. Each country had to face its specific problems, e.g. the disintegration of Czechoslovakia or hyperinflation in Poland. But the common feature of the development was initial decrease of the economy and an effort to join the NATO and the EU. Nobody expected that the success would appear after such long time. The Czech Republic had very good macroeconomic position after the fall of communist regime; there were neither debts nor inflation. The problem of the Czech economy consisted mainly in outworn industry and lost markets in Eastern Europe. Probably, satisfactory position of the Czech Republic led Czech politicians to the supposition that the economy does not need foreign investments and the sale of “national silver” is blameful. These ideas together with coupon privatization brought the country to the edge of chasm. The idea of “Czech ownership” hit, regrettably, many important companies (Tatra, Liaz, ČKD, Škoda Plzeň etc.) and banks. It was the worst thing that could happen. The situation, when state-owned banks owned shares of privatised companies, became known as a banking socialism. The initial advantage was totally lost in 1998. The oncoming crisis led to early elections and a new course in the Czech macroeconomic policy. Clerical government and later social democratic governments privatised all Czech banks. The cost for the rescue of Czech banks (paid by state) is estimated at 400 billion CZK. There was finally happened, what foreign economic experts recommended in 1990’s. But it was more expensive. Dramatic turnover of the Czech macroeconomic policy leaned on investment incentives. It means that capital inflow has been still rising since 1999 and restructuring of the Czech industry has been started. The graph 1 shows the development of foreign direct investment in the Czech Republic. Foreign direct investments cause the difference between domestic product and national income. Natural attribute of investment is the profit. It means that investments firstly increase domestic product (and income) due to expenditures on gross fixed capital formation and consecutively the growth of national income is reduced by transfers of profits because investors usually transfers a significant share of profits back to their shareholders. The graph 2 shows the difference between net domestic product (NDP) and net national income (NNI) in constant prices, where 1995 = 100 %.

Graph 1 Development of foreign direct investment in the Czech Republic, Poland and Slovakia, mil. USD 14000 12000

mil. USD

10000 Czech R.

8000

Slovakia

6000

Poland

4000 2000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: www.cnb.cz, http://www.nbp.pl, http://www.nbs.sk Graph 2 Economic growth in the Czech Republic, 1995 = 100 %. 120% 115% 110% 105%

NDP NNI

100% 95% 90% 85% 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: Czech Statistical Office Due to the positive effects of terms of trade, the differences between net domestic product and net national income were not significant by the year 2004. It is supposed that the gap will increase. The primary incomes, which consist of profits and wages paid to abroad (-) and received from abroad (+) has decreasing trend. It rose 37 times (in 2004) in comparison with 1995 in constant prices. This is clearly shown on graph 3. This means that in the context of rapid economic growth it is time to analyse the real impact on the economy. The Czech economy is going to be stronger and stronger but we also have to take into consideration created wealth that remains in the country. It is clearly explained by the ratio of national income on domestic product. This ratio for the Czech Republic, Slovakia and Poland is illustrated by the graph 4.

Graph 3 The balance of primary incomes in the Czech Republic, mil. CZK 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

0 -20 000 -40 000

mil. CZK

-60 000 -80 000 -100 000 -120 000 -140 000 -160 000

Source: Czech Statistical Office Graph 4 Net national income as a percentage of gross domestic product 88 86 84 82

%

80 78 76 Czech R.

74

Slovakia 72

Poland

70 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: Eurostat Of course, this graph must be followed by the information about the economic level, see following table. Table 1 GDP per capita in PPS, EU-25 = 100 Country 1996 1997 1998 1999 Czech R. 70 67,8 65,4 64,8 Slovakia 45,5 46,3 46,9 46,6 Poland 42,1 43,9 44,9 46 Source: Eurostat

2000 63,7 47,5 46,8

2001 64,8 48,5 46,1

2002 66,3 51 46,3

2003 67,8 51,9 46,9

2004 70,2 53 48,8

The figures for the Czech Republic clearly show the decrease of the economy between 1997 and 2000 while Slovakia and Poland slowly rose. The turnover came in 1999 and from this year, the Czech economy has been still rising.

4. Conclusion The aim of this article was to show the possibilities of analyses that are (in our opinion) neglected. National accounts provide plenty of indicators, which are suitable for analyses. Nowadays the national accounts are widely accessible and they are not compiled only for statistical offices (and Eurostat) but they are compiled for the public. Moreover, taxpayers pay the costs of compiling national accounts. The pity is that many economic analysts focus only on GDP and they do not take into account other important aggregates. We showed consequences of Czech economic miracle in recent years. The progress is indisputable everywhere in central Europe. But our politicians (and their experts) still consider only GDP and offer infantile promises (e.g. government can maintain 8 % growth of economy). The area of foreign economic relationships will have to be analysed more precisely and it exceeds the possibilities of this article. We assume that these effects will deepen because we did not involve such events like expected investment of Hyundai and other companies in Northern Moravia. This region, comprising the south of Poland and the west of Slovakia, became known as European Detroit. The result is that GDP will rise, as many analyst say. But did anybody analyse the effects on national income?

References: [1] EUROSTAT: European system of accounts (ESA 1995). Luxembourg 1996. [2] FISCHER, Jan, FISCHER, Jakub. Měříme správně hrubý domácí produkt? Statistika, 2005, roč. 42, č. 3, s. 177–187. ISSN 0322-788x. [3] IMF: System of National Accounts 1993. United Nations, IMF, OECD, Eurostat, World Bank, New York 1993. [4] HRONOVÁ, S., HINDLS, R. Národní účetnictví - koncept a analýzy. C. H. Beck, Praha 2000. [5] SIXTA, J. The Estimates of Consumption of fixed capital. 8th International Scientific Conference Applications of Mathematics and Statistics in Economy (AMSE 2005) in Wroclaw. [6] http://www.czso.cz [7] http://www.nbp.pl [8] http://www.nbs.sk

Authors: Ing. Jakub Fischer, Ph.D. (Česká spořitelna Chair), [email protected] Ing. Jaroslav Sixta, [email protected] Dep. of Economic Statistics Faculty of Informatics and Statistics University of Economics, Prague nam. W. Churchilla 4 CZ 130 67 Praha 3 Czech Republic