Keep Us Strong WikiLeaks logo

Currently released so far... 97115 / 251,287

Articles

Browse latest releases

Browse by creation date

Browse by origin

A B C D F G H I J K L M N O P Q R S T U V W Y Z

Browse by tag

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
ETRD EAGR ETTC EAID ECON EFIN ECIN EINV ELAB EAIR ENRG EPET EWWT ECPS EIND EMIN ELTN EC ETMIN EUC EZ ET ELECTIONS ENVR EU EUN EG EINT ER ECONOMICS ES EMS ENIV EEB EN ECE ECOSOC EK ENVIRONMENT EFIS EI EWT ENGRD ECPSN EXIM EIAD ERIN ECPC EDEV ENGY ECTRD EPA ESTH ECCT EINVECON ENGR ERTD EUR EAP EWWC ELTD EL EXIMOPIC EXTERNAL ETRDEC ESCAP ECO EGAD ELNT ECONOMIC ENV ETRN EIAR EUMEM ENRGPARMOTRASENVKGHGPGOVECONTSPLEAID EREL ECOM ECONETRDEAGRJA ETCC ETRG ECONOMY EMED ETR ENERG EITC EFINOECD EURM EENG ERA EXPORT ENRD ECONEINVETRDEFINELABETRDKTDBPGOVOPIC EGEN EBRD EVIN ETRAD ECOWAS EFTA ECONETRDBESPAR EGOVSY EPIN EID ECONENRG EDRC ESENV ETT EB ENER ELTNSNAR ECHEVARRIA ETRC EPIT EDUC ESA EFI ENRGY ESCI EE EAIDXMXAXBXFFR EETC ECIP EIAID EIVN EBEXP ESTN EING EGOV ETRA EPETEIND ELAN ETRDGK EAIDRW ETRDEINVECINPGOVCS EPEC ENVI ELN EAG EPCS EPRT EPTED ETRB EUM EAIDS EFIC EFINECONEAIDUNGAGM EAIDAR ESF EIDN ELAM EDU EV EAIDAF ECN EDA EXBS EINTECPS ENRGTRGYETRDBEXPBTIOSZ EPREL EAC EINVEFIN ETA EAGER EINDIR ECA ECLAC ELAP EITI EUCOM ECONEFINETRDPGOVEAGRPTERKTFNKCRMEAID EARG ELDIN EINVKSCA ENNP EFINECONCS EFINTS ECCP ETC EAIRASECCASCID EINN ETRP EAIDNI EFQ ECOQKPKO EGPHUM EBUD ECONEINVEFINPGOVIZ ENERGY ELB EINDETRD EMI ECONEFIN EIB EURN ETRDEINVTINTCS EIN EFIM ETIO ELAINE EMN EATO EWTR EIPR EINVETC ETTD ETDR EIQ ECONCS EPPD ENRGIZ EISL ESPINOSA ELEC EAIG ESLCO EUREM ENTG ERD EINVECONSENVCSJA EEPET EUNCH ECINECONCS ETRO ETRDECONWTOCS ECUN EFND EPECO EAIRECONRP ERGR ETRDPGOV ECPN ENRGMO EPWR EET EAIS EAGRE EDUARDO EAGRRP EAIDPHUMPRELUG EICN ECONQH EVN EGHG ELBR EINF EAIDHO EENV ETEX ERNG ED
KMDR KPAO KPKO KJUS KCRM KGHG KFRD KWMN KDEM KTFN KHIV KGIC KIDE KSCA KNNP KHUM KIPR KSUM KISL KIRF KCOR KRCM KPAL KWBG KN KS KOMC KSEP KFLU KPWR KTIA KSEO KMPI KHLS KICC KSTH KMCA KVPR KPRM KE KU KZ KFLO KSAF KTIP KTEX KBCT KOCI KOLY KOR KAWC KACT KUNR KTDB KSTC KLIG KSKN KNN KCFE KCIP KGHA KHDP KPOW KUNC KDRL KV KPREL KCRS KPOL KRVC KRIM KGIT KWIR KT KIRC KOMO KRFD KUWAIT KG KFIN KSCI KTFIN KFTN KGOV KPRV KSAC KGIV KCRIM KPIR KSOC KBIO KW KGLB KMWN KPO KFSC KSEAO KSTCPL KSI KPRP KREC KFPC KUNH KCSA KMRS KNDP KR KICCPUR KPPAO KCSY KTBT KCIS KNEP KFRDCVISCMGTCASCKOCIASECPHUMSMIGEG KNNB KGCC KINR KPOP KMFO KENV KNAR KVIR KDRG KDMR KFCE KNAO KDEN KGCN KICA KIMMITT KMCC KLFU KMSG KSEC KUM KCUL KMNP KSMT KCOM KOMCSG KSPR KPMI KRAD KIND KCRP KAUST KWAWC KTER KCHG KRDP KPAS KITA KTSC KPAOPREL KWGB KIRP KJUST KMIG KLAB KTFR KSEI KSTT KAPO KSTS KLSO KWNN KPOA KHSA KNPP KPAONZ KBTS KWWW KY KJRE KPAOKMDRKE KCRCM KSCS KWMNCI KESO KWUN KPLS KIIP KEDEM KPAOY KRIF KGICKS KREF KTRD KFRDSOCIRO KTAO KJU KWMNPHUMPRELKPAOZW KEN KO KNEI KEMR KKIV KEAI KWAC KRCIM KWCI KFIU KWIC KCORR KOMS KNNO KPAI KBWG KTTB KTBD KTIALG KILS KFEM KTDM KESS KNUC KPA KOMCCO KCEM KRCS KWBGSY KNPPIS KNNPMNUC KWN KERG KLTN KALM KCCP KSUMPHUM KREL KGH KLIP KTLA KAWK KWMM KVRP KVRC KAID KSLG KDEMK KX KIF KNPR KCFC KFTFN KTFM KPDD KCERS KMOC KDEMAF KMEPI KEMS KDRM KEPREL KBTR KEDU KNP KIRL KNNR KMPT KISLPINR KTPN KA KJUSTH KPIN KDEV KTDD KAKA KFRP KWNM KTSD KINL KJUSKUNR KWWMN KECF KWBC KPRO KVBL KOM KFRDKIRFCVISCMGTKOCIASECPHUMSMIGEG KEDM KFLD KLPM KRGY KNNF KICR KIFR KM KWMNCS KAWS KLAP KPAK KDDG KCGC KID KNSD KMPF KPFO KDP KCMR KRMS KNPT KNNNP KTIAPARM KDTB KNUP KPGOV KNAP KNNC KUK KSRE KREISLER KIVP KQ KTIAEUN KPALAOIS KRM KISLAO KWM KFLOA
PHUM PINR PTER PGOV PREL PREF PL PM PHSA PE PARM PINS PK PUNE PO PALESTINIAN PU PBTS PROP PTBS POL POLI PA PGOVZI POLMIL POLITICAL PARTIES POLM PD POLITICS POLICY PAS PMIL PINT PNAT PV PKO PPOL PERSONS PING PBIO PH PETR PARMS PRES PCON PETERS PRELBR PT PLAB PP PAK PDEM PKPA PSOCI PF PLO PTERM PJUS PSOE PELOSI PROPERTY PGOVPREL PARP PRL PNIR PHUMKPAL PG PREZ PGIC PBOV PAO PKK PROV PHSAK PHUMPREL PROTECTION PGOVBL PSI PRELPK PGOVENRG PUM PRELKPKO PATTY PSOC PRIVATIZATION PRELSP PGOVEAIDUKNOSWGMHUCANLLHFRSPITNZ PMIG PREC PAIGH PROG PSHA PARK PETER POG PHUS PPREL PS PTERPREL PRELPGOV POV PKPO PGOVECON POUS PGOVPRELPHUMPREFSMIGELABEAIDKCRMKWMN PWBG PMAR PREM PAR PNR PRELPGOVEAIDECONEINVBEXPSCULOIIPBTIO PARMIR PGOVGM PHUH PARTM PN PRE PTE PY POLUN PPEL PDOV PGOVSOCI PIRF PGOVPM PBST PRELEVU PGOR PBTSRU PRM PRELKPAOIZ PGVO PERL PGOC PAGR PMIN PHUMR PVIP PPD PGV PRAM PINL PKPAL PTERE PGOF PINO PHAS PODC PRHUM PHUMA PREO PPA PEPFAR PGO PRGOV PAC PRESL PORG PKFK PEPR PRELP PREFA PNG PGOVPHUMKPAO PRELECON PINOCHET PFOR PGOVLO PHUMBA PRELC PREK PHUME PHJM POLINT PGOVPZ PGOVKCRM PGOVE PHALANAGE PARTY PECON PEACE PROCESS PLN PRELSW PAHO PEDRO PRELA PASS PPAO PGPV PNUM PCUL PGGV PSA PGOVSMIGKCRMKWMNPHUMCVISKFRDCA PGIV PRFE POGOV PEL PBT PAMQ PINF PSEPC POSTS PHUMPGOV PVOV PHSAPREL PROLIFERATION PENA PRELTBIOBA PIN PRELL PGOVPTER PHAM PHYTRP PTEL PTERPGOV PHARM PROTESTS PRELAF PKBL PRELKPAO PKNP PARMP PHUML PFOV PERM PUOS PRELGOV PHUMPTER PARAGRAPH PERURENA PBTSEWWT PCI PETROL PINSO PINSCE PQL PEREZ PBS

Browse by classification

Community resources

courage is contagious

Viewing cable 05PRAGUE1325, CZECH REPUBLIC: IS RUNNING IN PLACE GOOD ENOUGH

If you are new to these pages, please read an introduction on the structure of a cable as well as how to discuss them with others. See also the FAQs

Understanding cables
Every cable message consists of three parts:
  • The top box shows each cables unique reference number, when and by whom it originally was sent, and what its initial classification was.
  • The middle box contains the header information that is associated with the cable. It includes information about the receiver(s) as well as a general subject.
  • The bottom box presents the body of the cable. The opening can contain a more specific subject, references to other cables (browse by origin to find them) or additional comment. This is followed by the main contents of the cable: a summary, a collection of specific topics and a comment section.
To understand the justification used for the classification of each cable, please use this WikiSource article as reference.

Discussing cables
If you find meaningful or important information in a cable, please link directly to its unique reference number. Linking to a specific paragraph in the body of a cable is also possible by copying the appropriate link (to be found at theparagraph symbol). Please mark messages for social networking services like Twitter with the hash tags #cablegate and a hash containing the reference ID e.g. #05PRAGUE1325.
Reference ID Created Released Classification Origin
05PRAGUE1325 2005-09-13 12:35 2011-08-25 00:00 UNCLASSIFIED Embassy Prague
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 04 PRAGUE 001325 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
STATE FOR EUR/NCE ERIC FICHTE, EB/IFD, E DAN MORRISON 
STATE PLEASE PASS USTR LISA ERRION 
COMMERCE FOR ITA/MAC/EUR MIKE ROGERS 
TREASURY FOR OASIA ANNE ALIKONIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EZ PGOV
SUBJECT: CZECH REPUBLIC: IS RUNNING IN PLACE GOOD ENOUGH 
FOR THE ECONOMY? 
 
REF: A. PRAGUE 1176 
     B. PRAGUE 911 
     C. PRAGUE 707 
 
1.  (SBU) SUMMARY:  According to the GOCR,s June 2005 
economic strategy, the Czech Republic hopes to reach the EU 
average GDP per capita by 2013 (from USD 19,700 to USD 30,000 
using PPP).  To this end, the Czech economy,s near term 
outlook remains strong.  Real GDP growth reached 4.4 percent 
in 2004 due to a surge in investment and exports related to 
EU entry, and is projected to remain healthy in 2005-2006. 
2005 2Q GDP reached 5.1 percent, the best since 1996. 
Inflation (CPI) remained low in 2004 at 2.8 percent and is 
likely to remain below the three percent Maastricht 
Convergence Program target through end-2006.  Such rosy 
figures, however, do not tell the whole story.  As noted 
recently by IMF staff, the Czech Republic,s main problem is 
that growth cannot be sustained if problems stemming from 
continued rigidities in the labor market and the 
business-legal environment, and challenges from a fast-aging 
population are not addressed in a timely fashion (2005 
Article IV Staff Report).  With June 2006 elections looming, 
meaningful reforms under the current center-left Social 
Democrat (CSSD) government seem unlikely before the 
elections.  The likelihood of reform after the elections will 
depend heavily on the nature of the coalition government, 
particularly on the degree of success by the more 
business-friendly center-right Civic Democrats (ODS) (Reftel 
C).  END SUMMARY. 
 
------------------------- 
Investment Climate 
------------------------- 
2.  (U) An often-cited statistic indicative of the dynamic 
Czech economy is that it enjoys the highest per capita 
Foreign Direct Investment in the region (USD 3,000 per capita 
FDI for a population of 10 million).  In fact, Fitch upgraded 
the investment rating for the Czech Republic on August 26 
from A minus to A.  While there is no question about the 
attractiveness of the Czech Republic to foreign investors 
given its central location, highly skilled labor force, 
relative low wages, and free access to the rest of the EU 
market, the sustainability of FDI inflows, particularly given 
increasing regional competition, is a key distraction. 
Although neighboring countries like Slovakia are starting 
from a lower base, the possibility of their more forward 
leaning and more business-friendly policies drawing FDI away 
from the Czech Republic is a constant preoccupation. 
Investors cite weak creditor rights, excessive discretion of 
bankruptcy judges, and cumbersome and lengthy legal 
procedures as key continuing problems with the local 
investment climate. 
 
3.  (U) Although official figures tend to underestimate US 
investments because a significant portion of US FDI comes 
through third countries, particularly through the 
Netherlands, US FDI in the Czech Republic is listed at 5.3 
percent of total 2004 FDI, behind he Netherlands at 30.3 
percent and Germany at 20.4 percent.  While there is no 
American flagship investor in the Czech Republic currently, 
the biggest names include Conoco/Dupont (USD 695 million), 
Philip Morris (USD 440 million), Pepsi-Cola (USD 305 million) 
and Coca-Cola (USD 210 million). 
 
4.  (SBU) CORRUPTION:  A September 6 public opinion poll 
identified corruption as the number one problem in the Czech 
Republic.  Transparency International Czech Republic (TI) 
reports that non-transparent public contracts caused a loss 
of CZK 32 billion (about USD 1.5 billion) in 2004.  TI 
attributes this to the lack of efficient controls in the 
government procurement process and excessive influence by 
politicians in public contract awarding procedures.  In June 
2004, TI published the results of its two-part Visegrad-4 
Corruption Index (V4 Index) covering five areas of public 
administration:  public procurement tenders, internal audit 
and control mechanisms, codes of ethical behavior, conflicts 
of interest, and public accessibility to information 
(www.transparency.cz ).  Part one looked at existing 
anti-corruption tools while part two surveyed the perceptions 
of anti-corruption tools, efficiency, as seen by the public. 
 Under part one, the Czech Republic came in third, with 
Hungary and Poland faring better and only Slovakia faring 
worse.   Under part two, however, the Czech Republic came in 
last place with particularly bad results in the area of 
conflicts of interest.  This study confirms widely held 
perceptions of endemic corruption, particularly in the form 
of conflict of interest with so many public officials 
simultaneously holding paid positions with commercial firms 
that bid on government contracts. 
------------------------ 
Structural Reforms 
------------------------ 
5.  (U) The GOCR,s main vulnerability regarding the 
Maastricht Convergence Program is its fiscal deficit (5 
percent of GDP in 2004), largely arising from structural 
issues outlined below, most of which relate to an anticipated 
demographic shock resulting from a combination of a 
fast-aging population and low fertility rates.  Further 
complicating the fiscal deficit pressures is that 
approximately 85 percent of the federal budget is 
non-discretionary.  On September 5, the Prime Minister 
Paroubek and Finance Minister Sobotka announced that the 
Czech Republic is aiming to adopt the euro in 2010, a year 
later than previously planned.  The main challenge remains 
reducing the structural fiscal deficit in a sustainable 
manner, below 3 percent of GDP by 2008.  Post will report on 
the 2006 budget by septel. 
 
6.  (U) TAX REFORM:  Tax reform, currently under discussion 
in Parliament, is the most likely structural reform to be 
implemented in the run-up to the June 2006 elections.  In 
response to regional tax competition (e.g. Slovakia,s flat 
tax rate of 19 percent), the GOCR started to phase in 
reductions in corporate income taxes and is planning to 
introduce permanent personal income tax cuts for low- and 
middle-income taxpayers in 2006.   The ruling Social Democrat 
party (CSSD) has proposed a more progressive tax regime by 
lowering the tax rate for the bottom two income brackets. 
While the opposition Civic Democrat party (ODS) will accept 
the CSSD plan for political reasons, the ODS prefers lower 
tax rates across income brackets and in fact, the flat tax is 
the flagship of the ODS.  One source close to President 
Klaus, camp of the ODS says that if the ODS wins in 2006, a 
flat tax regime would be a foregone conclusion.  The ODS 
proposes a flat tax of 15 percent for both corporate income 
tax and VAT (the minimum per EU regulation), as well as no 
new tax incentives, arguing that the current average VAT paid 
by Czech consumers is currently around 14.6 percent 
(pensioners pay around 13 percent given great dependence on 
goods vice services).  The current tax regime is as follows: 
corporate income tax of 26 percent for the tax period ending 
in 2005 and 24 percent in 2006 and thereafter; progressive 
personal income tax with rates from 15 to 32 percent; 5 or 19 
percent VAT. 
 
7.  (U) PENSION REFORM:  The Czech Republic has the second 
lowest fertility rate in the world and about one quarter of 
the current population is pensioners.  By 2050, the elderly 
will account for 53 percent of the population, and the 
working-age population will shrink by 22 percent compared 
with 2005.  Therefore, pension reform is one of the most 
pressing and politically charged debates.  Next year,s 
budget proposal earmarks over USD 10 billion for pensions -- 
almost 30 percent of all spending.  The IMF staff project 
budgetary spending on pensions and health care will increase 
from 14 percent of GDP in 2005 to 22 percent of GDP by 2050. 
There are two parts to the existing pension system: the 
mandatory basic pension insurance scheme, which is a 
pay-as-you-go system, and a voluntary supplementary, 
capital-funded, state-subsidized supplementary pension scheme 
based on defined contributions. 
 
8.  (U) In June, the GOCR submitted to the EU its NationalStrategy Report on 
Adequate and Sustainable Pensions, which 
concluded that the current pension system will be viable for 
about the next 20 years but not beyond unless further reforms 
are implemented.  During a July meeting with mainstream 
political leaders, PM Paroubek said parties should reach a 
reform consensus by the end of October.  On August 31, 
political parties made partial progress in parliament by 
agreeing to the establishment of a reserve fund and 
increasing the age of retirement tied to rising life 
expectancy.  Political leaders must agree on what percentage 
of the GDP should go to the pension system; the current 
figure is about 8 percent of GDP.   The ruling Social 
Democrat party (CSSD) proposes to introduce personal 
accounts, which would enable people to contribute to personal 
investment funds during their productive years so they can 
control their retirement payouts.  The opposition Civic 
Democrat party (ODS) wants to introduce a flat-rate pension 
and lower the mandatory contribution amount for workers so 
that all people receive the same lower pensions. 
 
9.  (U) HEALTH REFORM (Reftel A):  The Czech Republic,s 
share of public spending on healthcare is among the highest 
in the OECD.  The crux of the problem is poor incentives for 
cost control by providers and virtually free services for 
users.  According to the World Bank, in 1999 the Czech 
Republic health spending was USD 950 per capita, compared to 
USD 756 per capita in Hungary and USD 522 per capita in 
Poland.  Despite its importance and fiscal implications, 
there is a clear lack of consensus on the healthcare debate. 
 The payroll tax currently consists of 12.5 percent paid by 
employees (4.5 percent for healthcare and 8 percent for 
social security) and 35 percent paid by the employer (9 
percent for healthcare and 26 percent for social security). 
According to the January 2005 Ministry of Health,s Proposed 
Healthcare Policy for 2005-2009, one of the key problems of 
the healthcare system is overdue payables for the General 
Health Insurance Company (VZP), which as of June 2004 
amounted to USD 290 million.   In July, Health Minister 
Emmerova approved reforms measures, including USD 126 million 
for VZP and USD 34 million to the other eight 
semi-privately-run health insurance companies.  These 
measures distinctly lack any patient co-payments measures and 
insufficiently address the long-term implications of an aging 
population receiving free healthcare. 
 
10.  (U) LABOR REFORM (Reftel B):  The cost of the current 
level of unemployment (8 - 9 percent), in the form of 
benefits paid and taxes foregone, equals the size of the 
current budget deficit (about USD 4.2 billion).   According 
to the IMF, a virtually flat employment trend (2004 
unemployment rate of 8.3 percent) despite solid GDP growth in 
recent years is indicative of labor market rigidity.  Any 
future reforms must address tightening of benefit 
entitlements, encourage retraining, and increase geographical 
mobility of workers.  The average monthly wage in the Czech 
Republic is around USD 735.  The current system of 
unemployment benefits pays USD 175 per month per person, 
which starting in 2006 will reach USD 183 per month, and 
lacks any incentives for finding work.  Czech workers take 
more sick days than most other EU member states at 18.4 days 
per worker per year.  The Ministry of Labor has drafted a new 
Labor Code, which on August 28 PM Paroubek cited it as a 
priority before the 2006 elections.  However, the bill faces 
strong opposition from the business community, including from 
the American Chamber of Commerce, who views the code as a 
step backward because it does not make the labor market more 
flexible and better trained.  Local businesses often complain 
about the lack of skilled workers, especially in the 
mid-level technical fields.  The opposition Civic Democrat 
party (ODS) is considering a "negative income tax" on 
unemployment benefits, which would apply a shrinking 
percentage of benefits that still keeps nominal benefit 
levels increasing as you find work. 
 
------------------- 
EU integration 
------------------- 
11.  (U) EU REGULATIONS:  Since joining the EU in May 2004, 
much of GOCR resources have been dedicated to EU integration 
requirements.  In August, the European Commission said the 
Czech Republic came in 5th out of 25 EU member states in 
terms of failure in adopting EU regulations, with only Italy, 
Luxembourg, Greece and Portugal faring worse.  In addition, 
the EC warned three major steelworks that they would be 
forced to return GOCR subsidies if they fail to make progress 
in restructuring within the next 18 months, which are the 
terms negotiated during EU accession talks for that industry. 
 The EC also noted the GOCR,s, along with 15 other member 
states, slow speed in adopting EU directives for financial 
market regulation, including a failure to adopt directives 
for complementary oversight of financial conglomerates, 
reorganization and liquidation of loan institutions and 
reorganization and liquidation of insurance companies.  The 
EC warned that if the GOCR and the other 15 states did not 
provide within two moths a satisfactory answer to its 
criticism and a viable plan for future adoption of missed 
directives, it would bring the issue to the European Court of 
Justice. 
 
12.  (U) EU FUNDS:  On August 15, the local equivalent of the 
Wall Street Journal (Hospodarske Noviny) reported that the 
GOCR will not be able to spend all of its EU fund allocations 
due to delays in some programs, excessive bureaucracy and 
delayed payments by the EU.  The Czech Republic was allocated 
CZK 10.6 billion (USD 445 million) in EU structural funds, 
which it must spend by end 2006.  Absorptive capacity and EU 
bureaucracy are both obstacles to full and efficient use of 
EU funds. 
 
----------------- 
COMMENT 
----------------- 
13.  (SBU) Critics of the ruling Social Democrat party,s 
(CSSD) economic policies frequently tout that unless the GOCR 
adopts better policies, its traditionally considered "lesser 
brother" Slovakia will surpass the Czech Republic as the 
darling of Central Europe.  While some politicians overuse 
this argumentation, there is some truth to this claim in the 
medium to longer-term as foreign investors look more and more 
eastward for emerging opportunities.  While the Czech 
Republic has enjoyed a head start and suffered fewer economic 
fools in its recent political history, there is no denying 
that Slovakia is running faster, perhaps using its lower 
starting point and opportunities accompanying EU accession as 
motivation.  As a recent local editorial noted, if the CR 
wants to remain high on the investment map, especially as 
investors look further east where labor is even cheaper, it 
will have to deal with the bureaucracy, corruption and high 
taxes that could eventually outweigh the low labor costs.  It 
won,t be enough for the CR to run in place. 
CABANISS