OECD tells Czech Republic to build on reforms

OECD head says export-driven Czech economy must develop a more ‘innovative, skill-based and energy-efficient economy’

OECD Secretary-General Angel Gurría warns the Czechs against complacency foto: © OECD, Michael DeanČeská pozice

OECD Secretary-General Angel Gurría warns the Czechs against complacency

With the Czech economy’s export-driven recovery slowing, the country must move to swiftly implement new reforms that ensure sustainable, inclusive long-term growth and better resilience to external shocks, the Paris-based OECD says in its latest Economic Survey of the Czech Republic.

The report, presented in Prague on Friday by OECD Secretary-General Angel Gurría and Czech Prime Minister Petr Nečas (Civic Democrats, ODS) shows that the ongoing recovery has been weaker than in neighboring EU countries, constraining the pace of convergence in Czech income levels with those of more prosperous European countries.

“Growth and improvements in living standards will depend on the transition to a more innovative, skill-based and energy-efficient economy,” Gurría said in prepared remarks (the text of his full speech is available here).

According to the OECD, worsening trade performance and declining domestic demand will limit Czech economic growth, with significant downside risks linked to the continuing international slowdown and the outlook for the euro area.

“The current short-term growth outlook for the Czech Republic depends to a large extent on external conditions, which is normal for a small open economy. We project output growth to slow down to 1.6% in 2012 from about 2.1% in 2011, but there are important downside risks related to the outlook for the euro area and global economy at large,” Gurría said.

The OECD is therefore encouraging the Czech Republic to maintain momentum behind reforms aimed at enhancing competitiveness and long-term growth. The reform program should build on existing efforts to improve the business environment, strengthen the education system and promote innovation in line with the recently adopted Competitiveness Strategy, it said.

The Czech Republic has set itself the target of becoming one of the world's top 20 competitive countries in the near future.  “It is a fantastic aspiration, but it can be done,” said the OECD Secretary-General.

A special chapter of the Survey underlines the need to strengthen the country’s fiscal framework through the introduction of an explicit debt target and the establishment of an independent institution to monitor and assess the state of public finances, the OECD said in a press release.

The chapter also provides guidance for phasing in planned reforms in the health care and pension systems, including the creation of a new, voluntary, defined-contribution retirement pillar. “We support the Government’s current efforts to improve the Czech health care system. The proposal to strengthen competition among the health insurance funds and among service providers is welcome,” Gurría said in his speech.

Highlights from the “Economic Survey of the Czech Republic” report:
  • In order to strengthen the fiscal policy framework, the introduction of an explicit debt target should be considered and an independent fiscal institution should monitor and assess the budget as well as fiscal performance on all levels of government. Budgetary documentation should become more transparent and include performance indicators.
  • The pension system performs well in terms of keeping old age poverty low, but is not providing much diversification. The introduction of a new voluntary defined contribution pillar (“second pillar”) is a step in the right direction, which needs to be well communicated and accompanied by regulatory measures to allow the public to make informed choices. In particular, consideration should be given to establishing a central clearing house in order to keep fees low. Payouts in the form of annuities and life-cycle investment strategies should be the default options
  • The health care system functions well by and large, however, there is scope for improvements. While implementation of a diagnosis-related group payment system should strengthen cost consciousness among providers, a national capacity plan agreed by the major stakeholders should help to reduce excess capacity, in particular in the hospital sector. Soft gate keeping and digitalization of patients’ documentation can enable better care management. Mandatory active substance prescription as well as implementation of a digital prescription can help to keep costs of pharmaceuticals under control
  • The Czech Republic has an energy- and carbon-intensive economy, leaving important energy and emission saving opportunities underutilized due to insufficient incentives. This poses a risk to public health and energy security, increases the burden of agreed emission targets and might also mean foregone opportunities for growth. Instruments promoting energy efficiency need strengthening and should be more rigorously evaluated and better coordinated. To provide the right price incentives, excise tax rates on all fossil energy fuels should be harmonized to complement the EU Emission Trading System, notably by increasing the relative price of diesel. Support for renewable energy needs to be provided in a technologically neutral way to minimize its cost. Upgrading transport infrastructure and the attractiveness of public transport will be essential for containing the growth of emissions in this sector.