In mid-July, I had the privilege of participating in a discussion on dividends, sector taxes, and, ultimately, economic strategy with some influential and interesting economic policymakers, including Josef Stredula of the Unions, Karel Havlicek of Association of Small Businesses, and Radek Spicar of the Confederation of Industry. Everyone at the table deals with these issues daily, and do not agree on many details. This can sometimes lead to the conclusion that they agree on nothing. That is not true. In such a situation, sometimes it is necessary to widen the angle of the lens and, once you see the wider landscape, you can refocus.
That is what happened during the discussion. Mr. Stredula rightly argued that the point of an economy is lift the income of all citizens. Mr. Spicar rightly replied that income for employees cannot be lifted if the income for employers also does not rise. Everyone recognized that gains in productivity could not be achieved solely by a more efficient labor force working with greater automation; we must also have products which, once produced, demand a greater price on the global market. That means building greater capacity to consistently produce technology that can turn into global competitive products.
That is when the conversation became very interesting. Some argued that the country should focus on being the final producer of goods: the maker of automobiles, in other words, instead of parts. Others said Czech small and mid-size companies should be the primary focus for research subsidies and incentives. We would like both, but see a different way to get there. We believe the focus should be on the development and utilization (or production) of key technologies. Intel, for instance, is not the final producer of computers, or any device in which their product is. But it is a key technology and can charge a premium. The way to develop key technologies is to build university research departments that advance knowledge, and surround them with entrepreneurs and global businesses that can turn that knowledge into commercially successful products.
But how to do this? The first step is to accept reality, and try to augment it instead of denying it. The reality is this: Germany invests 30% of all EU spending on research; we spend less than 1%. That means to improve our productivity to support German salary levels, we are going to need to spend more, and have a higher rate of successfully commercialized research than Germany.
The other reality is this. For every euro the German public sector spends on research, German companies spend more than two. In the Czech Republic, the ratio is improving, but companies only spend 1.2 euros for every 1 invested by the government.
To rapidly improve our technological capabilities then, we need to attract companies with a good track record in profitably commercializing research to invest capital and knowledge into our universities in areas of research that have a high potential to produce key technologies for global products. We need a lot of private sector capital quick. We also need a sufficient number of companies that can convert that capital rapidly and a high rate of success into premium products sold through a global distribution network. We would argue that the most important question for the government should not be what is the color of your passport? Instead they should ask five questions: how essential is the product driven by this technology in your industry? how much will you invest in the technological infrastructure of our universities? how many of your engineers and scientists will work in our university laboratories and classrooms and for how long? Will you develop and produce all of the technology in the Czech Republic? And how certain are your global sales of the product if you can get it produced?
As for dividends, we argued that the number to watch is not outward flow, but reinvested earnings. And that the ratio of outgoing dividends paid to foreign investors in the Czech Republic to inward flowing dividends paid to Czech investors in global business represents a more relevant number for assessing the health of the economy. Outgoing dividends here are high. This reflects the large proportion of the economy driven by foreign capital. Inward flowing dividends are low. Part of this is due to the size of the country and how many global players it can generate; part of it may also be due to tax laws that encourage Czech companies to establish holding companies in the Netherlands.
We would argue greater attention should be focused on increasing inward dividend flow than restricting outward flow. Restricting outward flow may diminish foreign investment into the economy, which would have a negative impact on wage growth. Better to find a way to increase the amount of domestic capital available for domestic investment that leads to wage growth. Dramatically increasing inward flow returns us right back to developing global competitive technology.
As for sector taxes, we have to rid ourselves of the delusion that a tax is actually paid by the person or company that sends the money to the finance ministry. The tax is actually paid by the customer of a company that transfers the tax to the state. Most people complain that mobile rates and bank fees are too high; isn’t it a little strange for the government to propose increasing those costs by adding an extra charge for government services on top of the costs the company charges? Again, we come back to technology. What the economy needs to drive up prosperity and wages is for the banks and telecom companies to reinvest earnings. Perhaps instead of threatening profits, the government could find ways to encourage those companies to invest into new and more widely distributed technology that would create more economic opportunity for more citizens of the country. So, when you pull back from the everyday challenges of creating an economic policy that balances everyone’s interest, you quickly recognize that the primary challenge of any modern economy is having a strong technological infrastructure, and that we should start and end every policy discussion by setting that as our overriding objective.
Author: Weston Stacey, Executive Director, American Chamber of Commerce in the Czech Republic
29th October 2020
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