At an event in Prague today, we look at prosperity in the Czech Republic, where is has grown faster than the Western European average. This event is part of a series, following the launch of our 2016 Central and Eastern European Prosperity Report with Erste Bank earlier this year.

Read the report here.

The Czech Republic delivers prosperity surplus – but improvements in Social Capital, Education and Business Environment are needed for shift to a knowledge economy

Prosperity in the Czech Republic has grown faster than the Western European average, but starting from a lower base; it currently ranks 27th globally amongst 149 countries, finds the inaugural CEE Prosperity Index study published by the Legatum Institute and sponsored by Erste Group Bank. Although its ranking improved only marginally over time (from 28th in 2007 to 27th in 2016), the country has built strong foundations and is performing well across most of the pillars of the Prosperity Index. The study reveals the Czech Republic has a ‘prosperity surplus’ – in other words it delivers more prosperity relative to its wealth levels. However, while the country is already engaging in high-end manufacturing, a shift to a knowledge economy can help it to move further up the value chain. Three areas that are crucial if it is to achieve that and improve its global competitiveness are Social Capital, Business Environment and Education, the authors of the study note.

The Legatum Prosperity Index™ ranks nations over nine areas: Economic Quality, Business Environment, Governance, Education, Health, Safety and Security, Personal Freedom, Social Capital and the Natural Environment. It goes beyond macroeconomic indicators to measure prosperity holistically, as a function of both material wealth and social wellbeing. As such, it views economic and social prosperity as inextricably linked, with each promoting the other.

In the prosperity sub-index rankings, the Czech Republic performs best on Education (24th) and scores lowest on Social Capital (78th). The four components of Social Capital are trust, family & community, civic engagement and civic participation. The study highlights mixed developments in areas of trust between individuals – for example lower levels of family and community social capital, in terms of helping strangers and financial help to others; but higher levels in terms of getting help from others. One marker that particularly stands out is low civic participation, with decreasing levels of people voicing opinion to a public official compared to ten years ago.

The CEE Index finds that poor Social Capital is a damaging and defining characteristic across the whole of Central and Eastern Europe, thus limiting countries’ ability to deliver prosperity. A Social Capital deficit is significantly correlated with higher levels of corruption, weaker rule of law, and poorer business regulation.

“The centrality of Social Capital cannot be overstated – a low score feeds into other areas such as Governance, Economic Quality and Business Environment. When people do not trust that their fellow citizens are playing by the rules, that institutions are enforcing those rules fairly or that there is a shared understanding of the public good, other areas of public life are damaged too,” explains Shanker Singham, Legatum Institute’s Director of Economic Policy & Prosperity Studies.

The highest improvement in scores was recorded in the Business Environment pillar, where the country’s ranking jumped 20 places over the past ten years to 30th in 2016. Nevertheless, the score is still below Germany and Western European average and there are further areas of improvement. Although the overall score of ease of starting a business has been improving and is now higher and comparable to the Western European average, this contrasts with the perception of the Czech Republic as a good place to start to a business, which has not been improving over the past three years. Perceptions of whether it is possible to get ahead by working hard are also worse than the Western European and world averages. This gap in terms of perceptions could arise from bureaucracy and frequent changes in law and taxation, and reflect the higher expectations of the private sector from the public sector.

The Czech Republic’s Education score has been increasing over time and is now one of the highest in the Central and Eastern European region. The country is poised to catch up with more advanced economies such as Hong Kong, Germany or Sweden on this dimension. However, the authors of the study point out the sharp contrast between technical/vocational enrolment, which is relatively high, and tertiary enrolment, which is relatively low compared to Western European average. If the Czech Republic is to successfully undertake the shift towards a knowledge-based economy, tertiary education also needs to keep pace with developments in industry and manufacturing.

Improvements in Social Capital, Business Environment and Education can help the Czech Republic to avoid being stuck in the middle-income trap. Examples of other economies that have transitioned from a manufacturing to a knowledge-based economy – Hong Kong, Singapore, Sweden – show that these tend to have higher scores across these areas.