OECD warns of complacency

12.03.08 15:32 Filed in: The Prague Post
Agency supports reform drive as union opposition sharpens

The Czech Republic has a good chance to catch up with the economies of its Western neighbors, but it needs to reform its labor market, push ahead with healthcare reform and boost university education, the Organisation for Economic Co-operation and Development (OECD) — often called the world’s most-influential think tank — said in a recent review released March 4.
Despite last year’s record-setting economic growth, the Czech Republic retains a sizeable gap in gross domestic product (GDP) per capita and labor productivity compared with the OECD average, which comprises the world’s 30 richest nations.
Temporary growth can present a danger to reform efforts, said Angel Gurría, the OECD’s secretary-general, who plans to tout the study’s recommendations for the Czech Republic during a visit late next month.
“Good economic conditions may in fact retard structural reforms insofar as they temporarily mask underlying weaknesses,” he said. “That is one of the cruel paradoxes of the political economy of reform.” Short-term growth prospects have lately been revised downward, he added.
The OECD’s endorsement of the center-right government’s push for reform comes as the governing coalition, led by the Civic Democrats, finds itself facing a familiar foe: The Czech Confederation of Bohemian and Moravian Trade Unions (?MKOS), the country’s largest union umbrella organization, with 540,000 members.
The ?MKOS has declared a strike alert in protest of the public finance reform, which came into effect Jan. 1, and the looming specter of further reforms planned for the health care and pension systems. The unions will meet four times in the next two months, likely leading to a worker demonstration, the unions said.
A general strike should not be entirely unexpected, the ?MKOS chief, Milan Št?ch, told reporters March 6. Št?ch is also a senator for the opposition Social Democrats, who vehemently oppose the reforms, which have progressed almost entirely without their support.
The ?MKOS will continue to express its disapproval of the introduction of a “flat rate” income tax and the further reduction of corporate tax rates, added ?MKOS Vice President Marcela Kubínková.
“We are calling for the reintroduction of a progressive income tax system, based on gross income — typical in other developed EU countries — instead of super-gross income,” she said. “Super-gross” measurements of income, used in the flat tax, include social and health payments.
In its report, the OECD criticized some aspects of the country’s employment protection legislation, which is bound to draw fire from the unions.
The laws contribute to high long-term unemployment, the report said, and the government should reduce the notice period and severance pay requirements at jobs with short tenures. While a less constraining Labor Code came into force in January 2007, it still falls short and, in particular, dismissal procedures should be lightened further, the OECD said.
The ?MKOS will guard against any attempt to allow for unfounded firing of employees, Kubínková said.
“We disagree with those who claim that this slows down economic development and business activity,” she said. “The facts don’t support this. To dismiss an employee is a major interference in the social, economic and personal existence of the employee and his family, and might have a negative psychological impact. Work cannot be made subject to easier termination, unless this is accompanied by active measures that allow those fired employees to find new jobs.”
The OECD has grumbled that not all of its recommendations have been followed. In a 2007 report, it called on the country to cut the high tax burden placed on low-paid consumers, in order to encourage employment and reduce the incentive for companies to subcontract with “self-employed” workers.
In the meantime, the government adopted the public-finance reform, which included the introduction of a flat tax on personal income and a rise in the value-added tax. The OECD expects these changes to mainly benefit higher-income earners, an assertion disputed by the Finance Ministry.
“We must deny the idea that we have not reduced income tax on low earnings,” said Finance Ministry spokesman Jakub Haas. “Take the following example: A taxpayer with approximately one half of the average gross wage (10,000 K? a month) … paid 456 K? monthly before the reforms. Now he pays 0 K?.”