The Economic Survey of the Czech Republic for 2011 was presented to the Czech government by OECD Secretary General Ángel Gurría who expressed his support to the reform efforts of the government. The regular survey contains the OECD assessment of the state of national economies, analysis of government policies and recommendations for further reforms.
Strengthening the competitiveness
The OECD recommends that the Czech government continues with its reforms, especially with the effort to increase competitiveness and the long-term growth. The organisation also praises the government`s target to improve the business environment, strengthen the education system, support innovation and reform the pension, social and health care systems. It especially welcomes the government`s recently-passed Competitiveness Strategy. The document responds to the current situation and offers a comprehensive approach to structural reforms. According to Ángel Gurría, it will also help the Czech Republic in its transition to an innovative economy based on energy conservation.
Increased rating of the CR
OECD appreciates the Czech Republic`s recent rating increase. "This counts double today. You are moving upward and in the right direction," the Secretary General said. He also pointed out that this increase was caused by a better access to the domestic market. "Everyone has noticed this. The markets are going down and your evaluation is going up. These influences are also transmitted and this must be taken into account," he added. At the same time, the report warns against a slowdown in the Czech economy`s revival due to the large percentage of exports in the domestic economy. Namely for this reason the organisation recommends to implement the reforms as quickly as possible; the reforms must not only contribute to the economic growth, but they must also increase its toughness against economic turbulences.
According to the Czech Prime Minister as the CR is small, open and strongly integrated with the EU economies, it is very sensitive to risks related to a slowdown in the global economic growth, and especially to risks related to current developments in the EU and the debt crisis in the eurozone. All of this is projected into the development of the fiscal policy and budget consolidation has become our main challenge.
Budget deficits decline
Without a consolidation of public finances, the state budget deficit would not fall below 5 % of the gross domestic product, the OECD report states, adding that worsening of the debt dynamics would also occur. At 4.8 % of the GDP, the Czech public budget deficit was in the end even lower than forecasts predicted. The Czech Republic has managed to decrease costs on debt servicing and administrative costs. Due to government measures, the deficit should stabilise at 3.7 % of the GDP this year. A further decrease to 3.4 % of GDP should occur in 2012, and even with an expected decrease in the pace of the gross domestic product growth to 1.6 per cent.
Approval of the pension reform
According to the OECD the pension system performs well in terms of keeping old-age poverty low, but it provides much diversification. The introduction of a new voluntary defined contribution pillar is a step in the right direction. The organisation also highlights an increase in the retirement age. It fundamentally improves the system`s sustainability and strengthens the link between benefits and contributions. In addition, increasing the retirement age will maintain a constant mean life expectancy at retirement for twenty years after 2030, the report says.
Functioning health care system
The organisation also positively evaluated the health care system in the Czech Republic. According to the OECD, it is functional, but despite this, there is room for further improvement. It criticises, for example, the redundant capacity of hospital beds, which would be appropriate to reduce. The efficacy of providing health care should also be increased by the new DRG payment system and the digitalisation of patient documentation.
Main OECD conclusions and recommendations
According to the OECD the deficit would remain above 5 % of the GDP and would lead to worsening the debt dynamics, without its consolidation in 2010 and 2011. However, the deficit came to 4.8 % of the GDP in 2010, which would be a better result than the original target, especially due to lower costs of debt servicing and administrative costs. Indicators of the capital adequacy and liquidity continue to be satisfactory, and recent stress tests carried out by the Czech National Bank confirmed a strong resistance to negative shocks. The OECD noted that the Standard and Poor`s agency increased the Czech Republic`s debt rating by two degrees to AA- (which helped decrease the aforementioned debt servicing costs).
Pension reform
- The OECD confirms the generally good direction of changes in the pension system, but at the same time it emphasises the importance of ensuring adequate financing for the system`s transformation.
- In the OECD`s opinion, an earlier increase in the legally-mandated retirement age, changes in indexation and other changes will fundamentally improve the sustainability of the public system and strengthen the links between benefits and contributions. In addition, increasing the retirement age will maintain a constant mean life expectancy at retirement for twenty years after 2030.
Health care reform
- The OECD analysis points to the Czech Republic`s considerable potential for improving life expectancy through improved health care. Using the potential benefits as a result of increased cost effectiveness in the health care system would at the same time lead to significant savings. According to the evaluation, the health care system functions well overall, but there is still room for improvement. It includes such things as a decrease in redundant capacity, especially in hospitals, the introduction of the DRG payment system and the digitalisation of documentation.
- Generic prescriptions and positive lists of drugs should bring savings in the area of rising costs for medicines. The OECD appreciates that the Czech Republic is planning to exclude some of the premium services from the package covered by public health insurance.
More transparent public contracts
- According to the OECD, an amendment to the existing public contracts law proposes important changes - especially in decreasing the limits for tenders, new organisational approaches and increases in the transparency of the entire process. These plans should be implemented as soon as possible, together with proposals for introducing the centralisation of state purchasing.
- Progress in the implementation of the Anti-Corruption Strategy can play an important role in increasing the efficiency of public contracts, which would potentially lead to widespread savings.
Competitiveness strategy
- The government`s Competitiveness Strategy is a response to middle term issues, which is highly appreciated by the OECD. The strategy offers a comprehensive approach to structural reforms through the involvement of the entire state administration.
- The OECD positively evaluates that three to six specific projects were created in every area of the Strategy with clear goals, timelines, responsible institutions and evaluating criteria.
- Individual areas of the Strategy correspond with many OECD recommendations from recent years.
- According to the OECD, there is an effort towards the consistency between the Competitiveness Strategy and other existing strategies.
Labour market
According to the OECD, certain improvements have occurred recently which improves the flexibility of the economic environment. These include:
- increased flexibility in the labour market due to amendments of the Labour code from 2007 and a gradual shift from labour to consumption taxation
- single poins of contacts for gaining information and taking care of formalities
Cooperation with NERV
- The OECD considers the government`s discussion with the National Economic Council (NERV) on issues of structural policy to be a commendable practice.
- According to the OECD, NERV came up with many economic-political base materials which examine various aspects of the Czech economy and which were used for the government`s important political decisions, and at the same time stimulated a wider public discussion.
OECD Economic Surveys (for download)
