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UNCLAS SECTION 01 OF 03 PRAGUE 001414 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/NCE ERIC FICHTE, EUR/ERA 
COMMERCE FOR ITA/MAC/EUR MIKE ROGERS 
TREASURY FOR OASIA ANNE ALIKONIS 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EINV ECIN SOCI SCUL EZ
SUBJECT: CZECH REPUBLIC: SKILL GAPS IN LABOR MARKET 
THREATEN LONG-TERM COMPETITIVENESS AND FDI 
 
REF: A. PRAGUE 607 
     ¶B. PRAGUE 1239 
     ¶C. PRAGUE 1173 
 
¶1. Summary: The Czech Republic has been the darling of 
foreign investors in Central Europe, and as a result FDI is 
the number one engine of GDP growth. Foreign investors have 
taken advantage of the low-cost, highly skilled workforce and 
duty-free access to the EU to build mostly assembly plants, 
warehouses, and factories. With Romania and Bulgaria set to 
join the EU January 1, 2007, there are concerns regarding the 
sustainability of high-levels of FDI in the medium to 
long-term. The government investment promotion agency 
CzechInvest in 2003 started to refocus investment incentives 
to lure software and technology service companies, high 
value-added investments, and businesses that are less likely 
to move east in search of lower labor costs. However, labor 
shortages in qualified engineers and managers have prevented 
large-scale investment in these sectors thus far. This skills 
gap threatens to persist and reflects serious structural 
issues in education (post will report on Czech education 
reform via septel). Reforms needed to fulfill the goals of 
the Lisbon Agenda and to transform the country into a mature, 
services-driven market economy have only been further 
postponed by the current political stalemate (reftel A). End 
Summary. 
 
¶2. The Czech Republic,s economy has been booming in recent 
years, thanks in large part to foreign direct investment 
(FDI) (reftel B). Beginning in 2003 with the run-up to EU 
accession, Czech GDP growth has been steadily climbing. 
According to the Czech National Bank, the economy grew by 
3.2% in 2003, 4.4% in 2004, and a whopping 6.0% in 2005. 
Analysts are estimating GDP growth of 6.0% for 2006. FDI shot 
up to a record USD 11 billion in 2005, from USD 4.9 billion 
in 2004 and USD 2.1 billion in 2003, making it the largest 
recipient of FDI in Central Europe and 20th largest in the 
world. Former Deputy Vice Prime Minister for Economic Affairs 
Radek Spicar notes that foreign companies were initially 
attracted to the Czech Republic because of its macro and 
micro-economic stability, along with its relatively cheap, 
well-educated labor force and favorable location. This, 
combined with a strong infrastructure, has led to rapid 
development of assembly plants of various sorts, from cars to 
laptop computers to plasma TVs, largely for export to Western 
Europe. 
 
Troubles Ahead: Will FDI Continue at Current Levels? 
----------------- 
 
¶3. Despite being one of the fastest growing economies in 
Europe, there are legitimate concerns about medium to 
long-term sustainability of FDI and, in turn, GDP growth in 
the Czech Republic. Director of Investment Rene Samek from 
the investment and business development agency CzechInvest is 
worried about future growth, and with good reason. A recently 
released (October 2006) Ernst & Young European Investment 
Monitor Report shows a downward trend in the overall number 
of investment projects in the Czech Republic and other 
Central European countries, down from 19.8% in H1 2005 to 
12.8% in H1 2006. Manufacturing projects are moving east, and 
Sofia is now the fifth most popular destination for projects 
across Europe. In a country where, according to the Ministry 
of Industry and Trade Survey of the Czech Economy 2005, 73% 
of all exports were machinery and transportation goods, the 
loss of investment projects is a troubling sign that Czech 
competitive advantage in wages and location may be eroding. 
Czech wages are still much lower than in the west (3.42 
Euros/hour in the CR versus 16.18 Euros/hour in Germany), but 
are growing quickly: the 12.6% growth in wages since 2005 is 
the fastest rate in the EU. 
 
¶4. Since 2003, CzechInvest has refocused its investment 
incentives to try to attract software and service-sector 
investments, investments that have staying power. For 
investing as little as CZK 15 million (USD 750,000) and 
creating as few as 15 new jobs over a three-year period, 
companies can earn corporate tax relief for up to 10 years, 
financial support up to USD 8,900 per employee, and 
reimbursement up to 35% of employee training and retraining 
costs, according to CzechInvest. This policy has generated 
some success, winning business deals from the likes of 
Honeywell, IBM, and Accenture to build research and 
development and service support centers, but is exposing some 
weaknesses (i.e., low number of available skilled labor) of 
the Czech labor force to compete in an information economy. 
 
PRAGUE 00001414  002 OF 003 
 
 
Samek said that if a company requested 500 R&D engineers, he 
would recommend India. 
 
¶5. Samek says that the skills gap is forcing some companies 
to search for engineers from outside the country and work 
with universities directly. Companies such as Honeywell are 
actively recruiting engineers and other IT workers from 
Russia and Ukraine. This is supported by the Ministry of 
Labor and Social Affairs, which in 2004 launched a directed 
migration program that puts work visas and residence permits 
on a fast track for people with targeted skills. IBM has a 
program with the Czech Technical University in Prague to 
train faculty and students, offer internships linked to 
studies and IBM projects, and fund and provide technical 
expertise for thesis work. This gives IBM the advantage of 
recruiting and hiring engineers before they finish their 
studies. 
 
¶6. The government has proposed new legislation that is 
currently in Parliament, which will change tax incentives for 
major investments in the manufacturing sector. Beginning in 
2007, manufacturers would qualify for tax breaks for 
machinery and technical investments that require highly 
qualified technicians to operate rather than assemblers. If 
approved, the proposed law would amend the landmark 
investment incentive legislation first passed in 2000, which 
has helped bring the bulk of foreign investment to the Czech 
Republic. 
 
Transforming the Workforce: Need for Education Reform 
------------------ 
 
¶7. There is broad consensus that Czech long-term 
competitiveness will hinge on human resources rather than on 
wage or location advantages. To ensure continued economic 
growth, the Czechs must be better skilled in the sciences and 
in foreign languages, but there are institutional problems in 
education that prevent this from happening. The Czech 
Republic,s Lisbon Agenda National Reform Program points out 
that secondary schools face a shortage of qualified teachers, 
computers, and counseling services, and universities still 
need to reform their curriculum to offer shorter, more 
practically-oriented degree programs. Despite a soaring 
economy, the amount of public funding devoted to education is 
relatively low. Education spending in the 2007 proposed 
budget amounts to 3.04%/GDP, down from 3.4%/GDP in 2006 and 
up from 2.46%/GDP in 2005. Czech educational expenditures are 
among the lowest in the EU, whose average is 4.9%/GDP. 
 
¶8. The budgetary pinch has kept secondary teacher salaries 
low and is having a big effect on recruitment, retention and 
quality of teachers. According to a recent article in the 
daily newspaper Pravo, Czech monthly salaries for all 
secondary teachers are CZK 18,771 (USD 850), and for foreign 
language teachers, CZK 16,000 (USD 720). These pay scales 
represent an increase of 6.6% over 2005, but still fall short 
of the national average salary of CZK 20,096 (USD 915). 
Figures from the Czech Statistical Office support this. In a 
pay survey covering 17 different professional fields, 
educators came third from last, with only forestry workers 
(hunters) and hotel and restaurant workers earning less. 
Teachers are demanding a 25% pay increase, but the Education 
Ministry has refused to consider it because of the 
government,s current budget problems (reftel C). 
 
¶9. Lower salaries have created staffing gaps at schools, 
especially in foreign languages. According to an article in 
the business daily Hospodarske Noviny, there are five times 
more English philology students at the pedagogical faculty 
than there were 10 years ago. But only a few will choose 
teaching as a career when they can earn twice as much in the 
private sector with their language skills alone. Schools are 
lowering standards as a result of the shortage of teachers. 
According to one report, only 29% of foreign language 
teachers have a teaching credential. 
 
¶10. Insufficient spending on education is delaying the 
country,s transition to an &information economy.8 In 2002, 
the Ministry of Education launched its Internet for Schools 
program that aimed to provide all state schools with 
computers and a connection to the Internet. This program 
helped reduce the gap from 1 computer per 50 pupils to 1 
computer per 14 pupils. However, according to a survey on the 
use of Internet communication technology by households and 
individuals in 2006, half of the Czech population has never 
used a computer.  Former Vice Prime Minister for Economic 
 
PRAGUE 00001414  003 OF 003 
 
 
Affairs Jiri Havel explains that the digital divide is a 
socio-economic divide between wealthier families with 
computers and Internet at home, and those who must rely on 
the public schools for computer training. 
 
¶11. Perhaps because of their lack of exposure to computers 
and technology, Czech students have relatively little 
interest in pursuing studies and jobs in the computer or 
engineering fields. Ministry of Education Department of 
European Integration Head Michal Kadera reports that the 
acceptance rate for Czech Technical University in Prague 
(CVUT) is 85%, whereas it is 43% for humanities-oriented 
Charles University. Overall, Kadera says that two-thirds of 
all Czech students are studying humanity-related subjects, 
such as languages, economics, and law, though the jobs are 
elsewhere. Today, Czech technical universities graduate 5,000 
engineers a year, which is 55% of the EU-25 average. 
According to the Czech Labor Office, more than 9,000 
technical and IT jobs are going unfilled. 
 
¶12. The Czech Republic has one of the lowest percentages of 
university educated adults in the EU because of a high 
student drop-out rate. Only 11% of the population has a 
university degree, in comparison to 19% in the EU. Recent 
statistics from the Ministry of Education show a 50% jump in 
the student population from 2000 to 2005, but almost 30% will 
withdraw before graduation. Spicar notes that even though 
many universities have introduced shorter three-year bachelor 
programs, most Czech university students prefer masters 
degrees. Kadera also says that among public universities 
master-degree programs dominate and lack any practical 
orientation. Kadera again believes that a revamped curriculum 
with shorter and more practically-oriented programs along 
with career counseling is the solution. 
 
¶13. Comment: The Czechs lag significantly behind the EU in 
several important areas and need many structural reforms in 
education to catch up. The percentage of the population with 
university degrees is 60% of the EU average, and the 
percentage of graduates with technical or science degrees is 
55% of the EU average. No matter who forms the next 
government, education reform needs to be addressed for the 
long-term sustainability of a small, FDI-dependent open 
economy like the Czech Republic. End Comment 
GRABER