Growth in the Czech Republic is projected by the OECD to be around 4 per cent, somewhat above potential, this year and next, marking substantial progress over past performance and reflecting the success of past reforms. Investment and exports are expanding rapidly, taking over from a period of strong increase in domestic consumption. This good performance needs to be sustained, and preferably bettered, for living standards to catch up with the OECD average at a reasonable pace. This means creating the right conditions for continued capital deepening, efficient utilisation of labour resources and the further development of relevant skills. In many areas, good policy has already created healthy conditions for growth. For some years now, inflation has been low and stable and membership of the EU has prompted further progress in structural reform. Indeed, institutions and policies now closely resemble...

Membership of the European Union has marked the end of the Czech Republic’s transition to a market economy. Institutions, policies and, in broad terms, the role of the state in markets and the structure of economic activity now differ little from many other OECD countries. Furthermore, an impressive record of low inflation has been maintained. With such positive developments a strong process of catch-up would normally be expected. Czech GDP per capita is considerably below the more affluent OECD countries and under the right conditions the economy should have a healthy margin of growth on high-GDP-per-capita countries. The reasonably strong growth of recent years is a welcome sign that catch-up is underway, though a weak long-term record warns against complacency. There is broad support in the current political...

The importance of making fundamental reforms to public expenditure is increasing. As Chapter 1 illustrates, the widening deficit is reflecting strong increase in spending as a share of GDP against a relatively flat revenue profile. Looking forward, rapid growth in the number of old people in coming years will increase spending on pensions and boost demand for health care. In addition, the authorities must ensure appropriate investment in public infrastructure and make sure that sufficient funds are being spent on education and training to bring goals of developing a highly skilled and adaptable workforce to fruition. These spending pressures have to be addressed in an environment...

The Czech Republic, along with the other nine recent members of the European Union, is committed to joining the euro area and in broad terms also committed to undertake policies which facilitate entry. These are certainly not unwelcome conditions of EU membership. Indeed there is little doubt that there are potentially significant economic benefits, not only because of gains from joining a large currency area but also because the conditions for entry encourage maintaining low and stable inflation, and reductions in government deficit and debt that in themselves would improve growth...

Policy towards business has evolved considerably over the past decade or so and is now broadly similar to that found in many other OECD countries. The corporate-tax system includes targeted tax relief tilted towards poorer regions and favourable treatment of R&D spending as well as special support to small-and-medium enterprises. Markets are overseen by an independent competition authority, now backed up by the European Commission. And through privatisation the government has reduced direct ownership and control of production to levels comparable with many other OECD countries. Notably, the banking sector has been fully privatised (and there is now a strong foreign...

Since 1989 the Czech Republic has been increasingly exposed to international migration. With one of the highest incomes per capita in central and eastern Europe, the Czech Republic has received more immigration flows than the other countries in the region. Indeed, immigration has typically exceeded emigration, making the country one of net immigration. Nevertheless foreigners are still only a relatively small share of the population and integration issues are just beginning to surface, and fears of swelling migration flows in both directions after EU accession appear unfounded. Also, migration arising from the joint labour market agreement with Slovakia is helping to overcome imbalances in the labour market. Policy is only beginning to address immigration issues actively and...

There is growing concern that long-run sustainable development may be compromised unless measures are taken to achieve balance between economic, environmental and social outcomes. This chapter looks at two environmental issues relevant for sustainable development: climate change and air pollution. In each case, indicators are presented to measure progress and the evolution of potential problems, and an assessment is made of government policies in that area. An assessment of whether institutional arrangements are in place to integrate policy-making across the different...