Remarks by Angel Gurría
Monday 16 July 2018 - Prague, Czech Republic
(As prepared for delivery)
Dear Prime Minister Babiš, Ministers, Ambassador, Ladies and Gentlemen,
I am delighted to be back in Prague to present the OECD’s 2018 Economic Survey and the Environmental Performance Review of the Czech Republic. Let me begin by thanking Prime Minister Babiš for hosting us, and the Ministers of Finance, Health and the Environment for their presence and support in the preparation of these reviews.
Beginning with the Economic Survey, the good news is that the Czech Republic’s economy is thriving. The growth acceleration in 2017 to 4.6% is more balanced than in previous years. The economy is projected to keep growing at above 3% in both 2018 (3.8%) and 2019 (3.2%).
The unemployment rate at 2.4% is among the lowest in the OECD. Government debt has been decreasing steadily and at 34% of GDP is among the lowest in the OECD. In terms of disposable income, the country is one of the most equal societies in the OECD. And despite significant regional differences, the poverty rate after taxes and transfers has stayed low in the last decade, well below the OECD average.
This is quite a positive outlook. However, the Czech Republic still faces challenges which – if not tackled adequately – could deteriorate the inclusiveness and sustainability of the economy. Let me highlight a few that we consider crucial.
Firstly, the international context is a source of concern. The Czech economy is particularly exposed to trade disruptions given its high inclusion in global value chains. Exports in value-added terms contribute to around 45% of GDP. The United States and the United Kingdom are the second and third destinations respectively in terms of value-added exports of the Czech Republic. Therefore, escalation in import tariff hikes would be damaging for growth. A disorderly Brexit would hit the growth prospects as well.
Secondly, it is crucial for the country to overcome low labour productivity and labour shortages. Labour and skills shortages pose a risk to middle- and long-term growth and the upgrading of the economy, as the Czech labour market increasingly shifts towards higher-skilled employment. Providing workers with the right skills and training, as well as strengthening the effectiveness of R&D and innovation policies will be crucial to generate sustainable productivity gains and achieve inclusive growth.
This is particularly important in light of increasing digitalisation and automation which raise concerns on the future of jobs. Recent OECD work has estimated that around 14% of jobs in OECD countries are at high risk of automation, and a further 32% of jobs could face substantial disruption. This reflects quite accurately the situation in the Czech Republic, where 15.5% of jobs are at a high risk of automation and an additional 31.2% of jobs may experience significant changes to how they are carried out. Generally, here as elsewhere, the highest risk is concentrated in routine jobs with low skill requirements and often low wages.
The Economic Survey recommends addressing skills shortages and mismatches by increasing resources to education, skilling, reskilling and upskilling, and also involving employers in the design of vocational curricula and the development of internships.
Allowing women to play a greater role is also a priority to address labour shortages. Female labour force participation tends to fall with childbirth, partly due to long parental leave rules. In addition to reducing the maximum duration of parental leave by expanding affordable and quality childcare, helping women to re-enter the labour market can also be supported by providing rights for part-time work, flexible teleworking arrangements and shared jobs.
Another key challenge is ensuring fiscal sustainability with an ageing population. The dependency ratio in the Czech Republic will rise from 28.1% in 2016 to 56.1% in 2058. This will be a major challenge. Ageing-related spending represents already 43% of government budget and could rise above 75% if nothing is done. Pension and health spending in particular are expected to increase substantially due to population ageing.
Broadening the financing of ageing-related spending by expanding the base of contributions to all types of income will alleviate their impact on public finances. The country could also consider linking retirement age closely with life expectancy.
Finally, improving the quality and efficiency of the healthcare system is another key challenge. In the Czech Republic, indicators of the quality of care and outcome performance are missing in the management of healthcare. The system is also heavily regulated through the Reimbursement Decree which sets most prices and volume limitations of activities of health providers. Reducing the scope of this decree would allow for a genuine negotiation process between healthcare providers and insurance funds. The new diagnostic-related group system should be used for setting the prices of health services, but also to incentivise or reform underperforming hospitals.
These are just a few examples from the Survey, but since this is a double launch, we must move on to The Environmental Performance Review.
This is an area where the Czech Republic is not doing so well. The Czech economy remains one of the most energy- and carbon-intensive economies in the OECD due to its strong industrial base and reliance on coal. This brings severe consequences. The mortality rate from air pollution in the Czech Republic is nearly twice the OECD average, about 633 premature deaths per million inhabitants in 2016 compared to 352 in the OECD.
Waste management is another big challenge, which, despite progress, remains in urgent need of reform. In particular, landfilling remains the most common waste treatment method, accounting for 50% of waste treated by municipalities in 2016. Tackling urban sprawl is another growing concern. Czech cities are continuing to invest in public transport, but this is counterbalanced by increased car use, exacerbating air pollution.
In the face of these challenges, the 2018 Environmental Performance Review focuses on key policy recommendations for a greener economy. Let me highlight just a few.
First, it is vital to strengthen political commitment to a low-carbon economy and to align the long-term targets of the State Energy Policy with the Paris Agreement objectives. Nuclear power has been gradually replacing coal in the electricity mix. And the share of renewables also grew significantly, although it remains lower than the OECD average (11% in the Czech Republic compared to 24% in the OECD).
We also welcome the adoption of a Climate Protection Policy by the Czech Government in 2017. The next step should be to update the State Energy Policy accordingly and set the pathway to meet the 80% emission reduction objective for 2050.
Second, increasing carbon prices is a cost-effective way to tackle climate change and air pollution. Energy tax rates are maintained too low in the Czech Republic. Our simulations have shown that transferring a part of the additional revenue from higher taxes on heating fuels and electricity to low income households would improve energy affordability.
Stronger carbon price signals will also improve health by reducing air pollution and associated welfare costs that have been estimated at 6% of GDP in 2016. Removing the preferential tax treatment to diesel is key, while tightening environmental criteria of vehicle taxes and extending distance-based charging can promote fleet renewal and address air pollution.
Third, speeding up the adoption of the new Waste Act is indispensable to progress towards a circular economy. The planned increase in landfill taxes will be a welcome development. Landfilling is up to six times cheaper than incineration with energy recovery, which contradicts the waste hierarchy. Ensuring municipal waste fees cover the costs of service provision, and expanding volume-based pricing for collection of municipal waste will also encourage waste reduction and recovery.
Finally, the Review recommends making urbanisation more sustainable by strengthening the urban governance system and adopting a compact, coordinated, connected development model with a holistic approach to urban development.
And you will find many other assessments and recommendations in the Report.
Prime Minister, Ministers, Ambassador, Ladies and Gentlemen:
I’d like to close by thanking the Czech Government for their initiative, even for their insistence, that we launch these reports together. This is a sign of the strength of your political commitment to make all economic growth sustainable growth. And it resonates with the OECD’s recent work, which has shown decisively that policies to address environmental challenges are good for growth. In fact, we estimate that a climate-friendly policy package can increase long-run output by up to 2.8% on average across the G20 by 2050!
So count on the OECD; count on our continued friendship and our unwavering support as together, we design, develop and deliver better, more inclusive and more sustainable policies for better lives here in the Czech Republic. Thank you.