Assessment and recommendations

The Czech Republic is the most successful central and eastern European economy, measured in GDP per capita in Purchasing Power Parities and Prague is among the richest capitals in Europe. However, the country is still far behind where it was relative to the region1 in earlier times and convergence with the top OECD countries has stalled recently (Figure 1). Available estimates of potential growth rates suggest a rather sluggish medium-term real convergence of about 1 percentage point per year, down from about 1½ percentage points before the crisis. This deceleration is attributable to the slowing of trend labour productivity growth in the Czech Republic while there is acceleration in the OECD. The growth bonus linked to the post-communist transition, external opening and EU accession has been largely used up, the population is ageing fast, and increasing international energy and raw material prices will pose a further burden on growth. The economy is already well integrated in regional supply chains, the capital stock seems to be on a par with other EU countries and the FDI stock is above the EU average. Consequently, the share of Czech exports in the EU manufacturing good markets may have effectively peaked (IMF, 2011). Further convergence is therefore dependent on the transition to a more innovative, skill-based and more energy efficient economy producing higher value added goods and services.