Structural Transitions to Electric Vehicle Production: Czech Republic

IMF Selected Issues Papers are prepared by IMF staff as background documentation for periodic consultations with member countries. It is based on the information available at the time it was completed on December 12, 2022. This paper is also published separately as IMF Country Report No 23/32. 2023 JAN Structural Transitions to Electric Vehicle Production Czech Republic Stephen Ayerst and Neree Noumon SIP/2023/013 © 2023 International Monetary Fund SIP/2023/013 IMF Selected Issues Paper European Department Structural Transitions to Electric Vehicle Production: Czech Republic Prepared by Stephen Ayerst and Neree Noumon* Authorized for distribution by Miguel Segoviano January 2023 IMF Selected Issues Papers are prepared by IMF staff as background documentation for periodic consultations with member countries. It is based on the information available at the time it was completed on December 12, 2022. This paper is also published separately as IMF Country Report No 23/32. ABSTRACT: Sustaining the impressive convergence gains allowed by the Czech automotive sector has become challenging due to its comparatively lower value added, lower investments in research and development, and lower skills in the labor market. Using a structural model of global value chains, the paper examines policies to smooth the transition to the production of electric vehicles in Czechia. The analysis explores the impacts of increasing labor productivity, boosting production capabilities, and moving up the global value chain. These policies were found to have a relatively lower impact when they shift specialization towards lower value-added stages of production. RECOMMENDED CITATION: Ayerst S. and Noumon N. (2023) JEL Classification Numbers: E22, F23, J24, L62, L16, C54 Keywords: Automotive industry, Czech Republic, Convergence, Electric vehicles, Global value chains, Labor productivity, Structural Policy Author’s E-Mail Address: SAyerst@imf.org; NNoumon@imf.org SELECTED ISSUES PAPERS Structural Transitions to Electric Vehicle Production Czech Republic CZECH REPUBLIC SELECTED ISSUES Approved By The European Department Prepared by Stephen Ayerst and Neree Noumon. Assistance was provided by Ritzy Dumo and Iyad Alasal (all EUR). CZECHIA: STRUCTURAL TRANSITIONS TO ELECTRIC VEHICLE PRODUCTION _____ 2 A. Background: Automotive Production in Czechia _____________________________________ 2 B. A Structural Model of the Automotive Global Value Chain ___________________________ 5 C. The Transition to Electric Vehicle Production _________________________________________ 8 D. Conclusion and Policy Recommendations _________________________________________ 11 FIGURES 1. Cross-Country Comparison of Productivity and R&D ________________________________ 3 2. Sectoral Share of Czechia Economy __________________________________________________ 3 3. Intermediate Suppliers and Consumers from Czechia Auto Sector ___________________ 4 4. Value Added and Skill Intensity of the Automotive Sector ___________________________ 4 5. Electric Vehicle Production in Czechia ________________________________________________ 4 6. Automotive Global Value Chain Structural Model Illustration ________________________ 5 7. Illustration of the Automotive GVC ___________________________________________________ 7 8. Transition to Electric Vehicle Production _____________________________________________ 8 9. Impact of Policy on Employment and Value Added ________________________________ 11 TABLE 1. Calibrated Parameters ________________________________________________________________ 7 ANNEX I. Model Description and Calibration _________________________________________________ 14 References ____________________________________________________________________________ 13 CONTENTS December 12, 2022 CZECH REPUBLIC 2 INTERNATIONAL MONETARY FUND CZECHIA: STRUCTURAL TRANSITIONS TO ELECTRIC VEHICLE PRODUCTION1 Czechia automotive sector’s high integration into global value chains and its large economic contribution have allowed Czechia to experience a period of persistent convergence with advanced European economies. At the same time, sustaining those impressive gains is somewhat constrained by Czechia automotive sector’s comparatively lower value added, lower investments in research and development, and lower skills in the labor market. These challenges are exacerbated by in the context of the European automotive market’s transition to electric vehicles (EV) for which production tends to be more skill-intensive and concentrated at higher value-added stages of production. This paper examines—through the lenses of a structural model of global value chains— policies that could smooth the transition to the production of electric vehicles in Czechia economy context. In particular, the paper analyzes the impacts of a broad set of policies related to increasing labor productivity, boosting production capabilities in the current set of specialties, and