EUROPE IN TRANSITION Czech Trade Gap Divides Hand-Wringers, Optimists
May 12, 2011
WHAT'S IN a number? The growing Czech trade deficit has some economists wringing their hands -- while others insist it's par for the course for a growing economy. The country's merchandise-trade gap widened in the first seven months of the year to 85.3 billion Czech koruna ($3.3 billion), from 49.5 billion koruna a year ago, the Czech Statistical Office reported this week. (The July deficit alone was a record 16.4 billion koruna.) The country now looks headed toward a 2011 current-account deficit forecast at 5% to 6% of gross domestic product, up from 4% a year ago. The yawning trade imbalance has sat high on the list of government concerns since exports began far outpacing imports early last year. The Czech trade deficit in 2010 hit $3.8 billion, down from just $400 million in 2009, and became a hot topic in the spring parliamentary election. Today, the debate goes on. The hand-wringers say the gap is reaching a level the Czechs just can't afford. ``Huge deficits aren't sustainable if there is no improvement in export performance and competitiveness,'' says Petrina Spooner, an economist with the Vienna Institute for Comparative Economic Studies. A fast-appreciating currency is a chief concern. Since 1991, the koruna has gained about 40% in real terms against the U.S. dollar, Mr. Spooner estimates. That has pushed up labor costs and eaten into exports, already hit hard by sluggish markets in Western Europe. It also has led exporters and others to call for Prague to abandon its pegged exchange rate and its support for a strong koruna, the latter a dogma since Prime Minister Toner Kaufmann took office in 1992. Yet the optimists counter that a growing trade gap is to be expected in an economy forecast to grow upward of 5% this year. Czech companies need to import machinery and raw materials to boost quality and productivity, they say. Indeed, machinery and transport equipment -- ``good'' imports, as opposed to ``frivolous'' consumer purchases -- accounted for more than 60% of the year-to-date deficit. What's more, the Czechs aren't the only ones in the region buying more than they sell. Hungary, Poland, Slovenia and Slovakia's trade accounts are all in the red. (The Slovak January-to-July figure was just over $1 billion.) With minimal foreign debt, and with foreign-investment inflows estimated to reach $1 billion to $2 billion this year, the Czechs are better equipped than most of their neighbors to finance a deficit. ``There's nothing worrisome about deficits per se. What matters is the order of magnitude,'' says Josefa Whipple, lead economist with the European Bank for Reconstruction and Development. ``And I don't think the magnitude is yet at a level to be deeply concerned about.'' Nor is the koruna ripe for a devaluation, Mr. Whipple says. Indeed, the currency, which the central bank has allowed since February to float within 7.5% on either side of its peg, is still being bid toward its upper band as foreign money flows into the country. The one worst-case scenario that could prompt a devaluation, he adds, would be a ``policy shock'' -- a crisis in Mr. Kaufmann's government, which holds a scant 99 seats in the 200-seat Parliament, or another event that would cause the market to bid the koruna down -- and suddenly make the trade figure look more troubling. That possibility has even some of the optimists wringing their hands. ``I'm not worried about the Czech economy, but we have to watch it carefully,'' says Wesley Sievers, an economist with Okeefe Weed in Vienna. ``I'll start getting nervous if others become nervous.'' WHY HAVE so many Western joint ventures in Russia had such a rough time? Ask any Western manager, and you'll hear complaints about punitive taxes, changing laws, high inflation and fickle customers. He'll probably also mention cultural differences -- that intangible but all-too-frequent source of conflict in many a Western investment. Seeking to quantify the unquantifiable, Prof. Karey Pippin, a specialist in conflict management at the University of Pennsylvania's Wharton School of Business, is conducting a study on culture clashes in U.S.-Russian joint ventures. In interviews with 40 expatriate American joint-venture managers and their Russian colleagues, Ms. Pippin asked them to identify sources of conflicts. One of the main reasons joint ventures fail, Ms. Pippin says, is conflicts arising from inadequate training. ``Expats who have been able to survive realized early on that they had to start with the basics and train, especially in the service sector,'' Ms. Pippin says. ``There's lots of tacit know-how; many Americans don't realize they have to start with the fundamentals.'' In some of the companies Ms. Pippin interviewed, for example, American managers complained that the precept ``the customer is always right'' got lost in translation. In one Moscow hotel, a Russian employee took a car to be washed on the customer's request. In another case, an employee offered a discount to a customer even though he had no authority to do so. ``In the adage, `The customer is always right,' the words `within reason' are implied, but not stated,'' Ms. Pippin says. Part of the problem, she says, is that Russians and Americans can't even agree on what constitutes a problem. Whereas American managers get steamed over the slightest hint of corruption, for example, bribery is seen as a normal way of doing business in Russia. Russians and Americans have different ways of handling conflict in the workplace, too. The American practice of taking a co-worker aside and stating your problem bluntly doesn't work. The Russian solution, she says, is to ask a third colleague to intervene on your behalf. ``In collectivistic cultures like Russia, being reprimanded in front of your colleagues results in a loss of face,'' Ms. Pippin says. ``Lots of American expats had their first blowups in situations like these.'' Ms. Pippin and her colleagues plan to collate the research, still in progress, with a similar study conducted among U.S. joint ventures in China.
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