Remarks by Angel Gurría, OECD Secretary-General
18 November 2011, Prague, Czech Republic
(As prepared for delivery)
Good morning Prime Minister, Ambassador, ladies and gentlemen:
It is good to be back in Prague. I am particularly pleased to launch the new OECD Economic Survey of the Czech Republic together with Prime Minister Nečas.
A competitive economy – compliments and challenges
Let me start by congratulating you on the impressive reform agenda your government is pursuing under your leadership and the results you have achieved. The Czech Republic combines a stable economy, manageable fiscal and external balances, and a sound financial sector. The recent upgrade of the Czech Republic’s credit rating, the low spreads on the country’s sovereign bonds and strong investor confidence reflect the commitment of entrepreneurs, the efforts of workers and the quality of policymaking.
But, at the same time, challenges remain to sustain and promote a competitive economy and an inclusive society. There should be no room for complacency: given the Czech economy’s solid fundamentals, you should aim for the top. Like your national hockey team. As argued in our report, you have tough challenges ahead of you: to strengthen the fiscal policy framework, to make the economy less energy and carbon-intensive, and to implement pension and health care reforms. Let me outline the main findings of our Survey along these lines.
The short-term outlook
The current short-term growth outlook for the Czech Republic depends to a large extent on external conditions, which is normal for a small open economy. We project output growth to slow down to 1.6% in 2012 from about 2.1% in 2011, but there are important downside risks related to the outlook for the euro area and global economy at large.
Macroeconomic policies should support growth and provide stability in a difficult economic environment. For that, a strong fiscal framework is essential. It helps ensure the sustainability of the public finances in the longer term while creating the necessary policy space for supporting demand in a downturn. Establishing an explicit debt target would be useful in this regard and should be considered, together with an independent fiscal institution to monitor the budget and fiscal performance at all levels of administration.
As for monetary policy, the Czech National Bank has an excellent track record: inflation has been low and expectations are well anchored. The monetary authority should stand ready to react should external conditions deteriorate.
Go structural by strengthening competiveness and an efficient use of scarce resources
Additional structural reform would help the Czech Republic fulfil its economic potential. The recovery from the crisis has been weaker than necessary for ensuring a rapid convergence in relative living standards to the level of wealthier EU and OECD economies. Over the longer term, a transition to a more innovative, skill-based and energy-efficient economy will be essential for delivering faster economic growth and improvements in the wellbeing of the population. The Competitiveness Strategy, adopted recently by the government, will play an important role in promoting such transition. We welcome this Strategy and look forward to working with you on its implementation.
New sources of growth could also come from efforts to reduce the energy and carbon intensity of the Czech economy. Compared to EU and OECD averages, the Czech economy uses a lot of energy, produced primarily from fossil fuels. This poses a risk to public health and energy security; it increases the burden of meeting agreed emission targets; it makes the economy sensitive to variations in the international price of energy and raw materials. Green Growth and energy efficiency could be a powerful tandem to foster long-term sustained growth.
Important opportunities to save energy are underutilised due to weak incentives. Stronger price signals are therefore needed to change the way in which producers and consumers use energy. We recommend in our Economic Survey that excise tax rates on all fuels should be brought in line with the EU Emission Trading System. This involves an increase of the relative price of highly polluting diesel together with the elimination of fuel tax reliefs that discourage energy savings. The Czech Republic’s very effective social assistance network can be relied upon to cushion any adverse social implications of such measures on vulnerable social groups.
Sectoral policies to promote greener energy sources and improve energy efficiency need to address existing market failures. Support for renewable energy needs to achieve the right balance to avoid another unsustainable investment boom and to become more cost-efficient. At the same time, public transport should become more attractive to stem the growth of emissions.
On a bigger scale, the economy’s energy mix needs to change in a substantial manner: away from coal and towards greener energy sources and technologies. When making strategic decisions, policymakers need to consider the full life-cycle costs of different options and take into account all externalities. This is particularly important in the case of nuclear energy.
Go structural and go social by reforming the pension and health system
The Czech pension system has been effective at preventing old-age poverty. Looking ahead, the government is striving to improve the system’s sustainability through a series of bold reforms. This is necessary, because population ageing will put even more financial pressure on the pension system in the years to come. Gradual increases in the retirement age and its unification for men and women were necessary and -- as shown in the OECD’s Pensions at Glance -- the retirement age should be explicitly linked to life expectancy.
As part of ongoing reforms, your government intends to give individuals the option of investing part of their mandatory pension contributions in privately-managed funds. This is an important step to strengthen the link between benefits and contributions and could increase the retirement income of pensioners. It is also encouraging that the government is explicitly taking into account the financing requirements of the pension reform, in order not to weaken the current defined-benefit system.
But many pension reform measures are rather technical and not easy for the public to understand and accept. There is much the government can do to help, and the experience of several OECD countries can be extremely valuable in this area. For example, an efficient communication campaign is essential to help people make the right decisions about their pension plans. Having life-cycle investment strategies and payouts in the form of annuities also helps. And to keep administrative fees low, a central clearing house could be established for pension plans.
Let’s not forget health care. Czech citizens benefit from good-quality and accessible health care. But many “agents” act on behalf of others in the current system. Insurers act on behalf of policy-holders, the government acts on behalf taxpayers, and medical suppliers act on behalf of patients, who wish to become healthy again! The government therefore has an important coordination role to play to make sure that demand meets supply at a fair, affordable price.
We support the Government’s current efforts to improve the Czech health care system. The proposal to strengthen competition among the health insurance funds and among service providers is welcome. In the OECD area, Germany, Switzerland and the Netherlands are already moving in this direction. Additional steps are nevertheless needed to reduce an excessive number of hospital beds and increase the availability of long-term care. A national capacity plan, agreed by the major stakeholders, could play an important role in this respect. The Survey also recommends the introduction of soft gate-keeping to improve health care management and the digitalization of patients’ health records, while protecting their privacy.
Ladies and Gentlemen:
In spite of a bleak international context and a challenging outlook for Europe, the Czech Republic can be proud of its achievements. Today, Prague is again one of the most prosperous cities in Europe and you are moving in the right direction -- “back to the top”, as stated in your Competitiveness Strategy.
But you need to do more to consolidate your success and ensure sustainable and inclusive long-term growth. As in hockey, this is a team effort, and we look forward to working with you to help you reach your goals.
Reform urgently needed to ensure long-term growth in Czech Republic, says OECD