Between 2002 and 2005, annual growth in GDP per capita has risen from a little under 2% to 6%, and shifted above the average for other east-European OECD countries. Past reforms and accession to the European Union are contributing to further expansion of exportdriven manufacturing, backed by foreign-direct investment. Indeed, the trade balance has become positive. Nevertheless, catch-up with more advanced economies is some way off and maintaining this performance will require continued reform. Entry to the euro area is aimed for in 2010 and this may provide an additional fillip to growth. In addition, the current government has published a blueprint for reform, the Economic Growth Strategy. It contains a large number of detailed proposals, many of which echo past and present OECD recommendations, and should be used as a catalyst for change. The most important measures have to be taken in fiscal policy; it is very important that the next government faces up to the considerable challenge of putting deficits on a sustainable track through public-spending reform. Policy will also have to push ahead in making improvements to the labour market, including the skills base, and with measures to enhance the business environment.

Czech GDP growth picked up in recent years and future growth prospects look more favourable. This first chapter of the OECD’s 2006 Economic Survey for the Czech Republic examines this improved performance and makes a broad overview of the structural reforms needed to maintain a healthy pace of catch-up with other OECD countries. While inflation and interest rates are low, big challenges remain in ensuring fiscal deficits and debt are on a sustainable path for euro-entry and beyond. The chapter reviews recent changes in budgeting procedures, general progress in public spending reform and introduces the chapters on pension reform (Chapter 2) and on municipal and regional government (Chapter 3). A second set of policy challenges lie in labour market and education policy. Recent labour market reforms are assessed and the issues tackled in the in-depth examination of education policy (Chapter 4) are introduced. A third set of challenges lie in the business environment. The ongoing efforts to improve legislation, cut back on red tape and reduce corruption are reviewed and there is an overview of the issues in innovation policy (Chapter 5).

The Czech Republic faces one of the largest demographic challenges in the OECD area and making sure the public pension system is able to cope with rapid growth in older cohorts is important for long-term fiscal stability and social welfare. This chapter assesses five proposals for pension reform made in 2005 with a view to helping progress towards a final decision on reform. The proposals cover a wide range of options: only parametric change of the current pay-as-you-go (PAYG) system, systems combining a PAYG pension with a second-pillar (definedcontribution), a flat-rate pension and a system of notional accounts. The analysis uses OECD simulation models to compare the proposals in terms of fiscal sustainability, safety nets, early retirement incentives, diversification into private provision, simplicity and the pensions-earnings link.

This chapter looks at ways of ensuring that Czech regions and municipalities are fully motivated to make efficiency improvements in public service provision and so help achieve countrywide fiscal sustainability. The very large number of small municipalities in the Czech Republic means that scale economies are difficult to exploit and the policy options for overcoming this problem are discussed. In the financing system there are issues of transparency and of balance between autonomy for the regions and municipalities and central-government power to direct resources. In terms of accountability, questions of oversight and transparency arise in the public-procurement system and benchmarking in cost and output in public services is not yet widely used.

Widening the skills base and improving labour-market efficiency requires the support of good education. This chapter describes the structure of the education system, identifies weaknesses and considers ways to improve performance in light of the ongoing rapidly expanding demand for tertiary level education. The chapter discusses ways to modernise the public universities, including the introduction of tuition fees and strengthening co-operation between universities and enterprises. It also suggests mechanisms to widen access to secondary general education and to help the creation of a secondary school system better geared towards increasing tertiary-level enrolment. The chapter also considers ways for improving lifelong learning opportunities, for example through better frameworks for qualifications. The challenges in finding room in education budgets for co-financing the allocations of the 2007-13 European Union budget are also discussed.

The Czech government considers innovation policy a key component of the effort to improve the business environment. This chapter underscores the importance for the Czech Republic of expanding R&D activities that have a potential for commercial innovation. It also points to the relevance of good general business conditions in encouraging research and ensuring that the economy benefits from the international diffusion of innovation. Concerning targeted policies, the need for structural reforms to improve the research and innovation environment is described. The chapter looks at options to create a coherent governance framework for public R&D and to make the allocation of research funds efficient. Assessment of changes in R&D tax allowances and the strategy for giving direct support to innovative SMEs is also made. Finally, the chapter considers what reforms are needed to help the creation of stronger science-industry links and the take-off of the venture capital and “business angels” market.