Over the past two decades, the income level of the Czech Republic has converged considerably towards the OECD average. However, after the 2008 global crisis, the convergence process stalled. Shortfalls in labour productivity have developed and are mainly structural. Policies are needed to foster domestic sources of productivity growth. Better targeting of government R&D support and more focused innovation policies that would be aided by a streamlining of policy institutions and interventions are necessary. In particular, tailored policies to increase knowledge-based capital (skills, management capacity, collaboration, etc.) are necessary to increase Czech firms' productivity. Also, resources reallocation should be facilitated by reforming framework conditions. In particular, bankruptcy rules, competition and regulation policies, access to finance and SME taxation need to be improved to boost SMEs' growth and productivity.

Spending on public administration itself is relatively low and so are indicators of its performance. Challenges include wastage in public procurement, insufficient management of the investment cycle and high levels of staff turnover. This chapter considers ways of building on recent reforms, including better procedures for EU-financed projects and the new Civil Service Act, to raise the efficiency and effectiveness of the public sector. Performance monitoring is underused but could help drive improvements in service delivery. The structure of local government, which includes over 6 200 municipalities, exacerbates the challenges of the public administration by complicating co-ordination and stretching capacity. Accordingly, the second part of the chapter focuses on ways of improving the efficiency and quality of public service delivery and realising greater benefits from decentralisation.