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  Assessment and recommendations
  The economy is benefiting from a significant pick-up in growth – on average, real GDP increased by over 6% between 2005 and 2007 and the labour market has tightened significantly. The recent global financial turmoil has so far not affected the economy although weaker growth elsewhere may have some impact. A spike in inflation is currently denting real consumption spending, nevertheless, GDP growth is expected to be about 4½% in 2008 and then to rise close to potential of around 5% in 2009. The improved economic performance is being driven by export-oriented manufacturing, reflecting further deepening of the economy’s involvement in international production chains. The implications of globalisation for the Czech economy are the subject of an in-depth review in this Survey.
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  Recent developments and policy challenges
  This first chapter of the OECD’s Economic Survey of the Czech Republic looks at recent economic developments and policy challenges in sustaining a healthy pace of growth for the future. Growth has picked up significantly since the early 2000s and is improving catch up with other OECD economies. Manufactured exports and foreign direct investment are continuing to play a key role in the economy – this is followed-up in Chapter 4, which looks at the implications of globalisation for the Czech economy. So far, the rapid pace of economic activity has not raised underlying inflation. However, headline inflation is being hiked up by international market developments and policy measures, notably increases in indirect taxation. Even though last year’s government deficit has turned out below the level needed for entry to the euro area, ensuring fiscal sustainability is nevertheless an important policy challenge, and is followed up in Chapter 2. The second main policy challenge is widening labour supply and deepening skills, which is examined further in Chapter 3. The final sections of this chapter update developments in business, competition and the environment policies.
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  Ensuring fiscal sustainability: assessing recent tax and public spending reforms
  Public finance reform needs to remain a policy priority, particularly in light of upcoming fiscal challenges stemming from population ageing. This chapter examines the reform package enacted in 2007 that notably introduced a flat tax rate on personal incomes. In addition, it considers the initial steps and further reform plans in healthcare and the current state of play in the longstanding issue of pension reform. The chapter also looks at the challenges in accessing EU funds under the highly decentralised system for administering the allocations.
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  Tackling labour and skill shortages
  The fast pace of growth has moved the spotlight in labour market issues. In the past, the chief concern was with regionalised long-term structural unemployment. This problem is receding and a new challenge of ensuring labour supply has emerged. Unemployment rates hit an 11-year low at 4.9% in the last quarter of 2007 and the share of the working age population will start shrinking soon. To prevent labour supply becoming a constraint to growth, it is crucial that additional attention is paid to activating the remaining reserves of labour. This chapter looks at where possible reserves may lie and how policies could help bring them into employment. For young cohorts, education policy is the key issue. In other groups, comparison with other OECD countries shows there are sizeable reserves among prime age women and older cohorts, which link to family policy and early retirement incentives.
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  Globalisation and the Czech economy: how should policy respond?
  Favourable location and low labour costs have resulted in large inflows of greenfield investment and export-oriented manufacturing is playing a key role in the Czech Republic’s robust growth. This chapter looks at this process in depth and examines other influences of globalisation on the economy, such as changes in retail markets and the development of tradable services. The chapter also considers the policy implications. In general, the policies required to harness globalisation are the same as those needed to help overall economic growth. However, some specific areas require particular attention: investment incentives, support for small and medium enterprises, transport and urban infrastructure, and immigration policy.
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