2009 Index of Economic Freedom

Quick Facts

Population:

• 10.3 million

GDP (PPP):

• $227.2 billion
• 6.4% growth
• 4.5% 5-year compound annual growth
• $22118 per capita

Unemployment:

• 6.6%

Inflation (CPI):

• 2.8%

FDI Inflow:

• $6.0 billion

The Czech Republic's economic freedom score is 69.4, making its economy the 37th freest in the 2009 Index. Its overall score is 1.2 points higher than last year, primarily reflecting improvement in fiscal freedom and freedom from corruption. The Czech Republic is ranked 21st out of 43 countries in the Europe region, and its overall score is higher than the regional and global averages.

The Czech Republic's transition to a market-driven economy has been successful. The private sector accounts for more than 85 percent of GDP. As reflected in relatively high scores for fiscal and investment freedom, low taxation and openness to foreign investment have contributed to a strong economy. A reduced flat personal income tax of 15 percent became effective in January 2008. Trade freedom is relatively strong, and inflation is moderate, though the government maintains some price supports. The extensive banking sector includes significant foreign ownership, and financial services are highly developed.

There is room for improvement, however. The regulatory environment is generally consistent with a market economy, but bureaucracy and red tape retard entrepreneurial dynamism. Corruption is still perceived as significant. In January 2008, the government implemented a fiscal reform package that targeted tax policy and entitlement spending, but a fractured political environment has slowed needed health care and pension reforms.

Background Back to the top

The Velvet Revolution of 1989 peacefully overthrew the Communist dictatorship and led to the election of dissident playwright Vaclav Havel as president of a democratic Czechoslovakia. The Czech Republic separated from Slovakia and became an independent nation in 1993 and joined the European Union in 2004. President Vaclav Klaus of the conservative Civic Democratic Party was elected in 2003 and narrowly re-elected by Parliament in February 2008. Historically, Czech lands have been among the world's most industrialized. Economic growth over the past five years has relied heavily on exports to the EU. Tourism is also important.

Business Freedom 65.1 Back to the top

The overall freedom to start, operate, and close a business is somewhat constrained by the Czech Republic's regulatory environment. Starting a business takes an average of 15 days, compared to the world average of 38 days. Obtaining a business license requires twice the world average of 18 procedures. Closing a business is burdensome.

Trade Freedom 85.8 Back to the top

The Czech Republic's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some service sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Non-transparent government procurement regulation exceeds general EU policy, and the enforcement of intellectual property rights remains problematic. Consequently, 10 points were deducted from the Czech Republic's trade freedom score.

Fiscal Freedom 80.2 Back to the top

The Czech Republic has a low income tax rate and a moderate corporate tax rate. In 2008, the top income tax rate was reduced to 15 percent, and the top corporate tax rate was reduced to 21 percent. Other taxes include a value-added tax (VAT), a property transfer tax, and a tax on dividends. In the most recent year, overall tax revenue as a percentage of GDP was 36.3 percent.

Government Size 43.0 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 43.6 percent of GDP. The government has sold its remaining stakes in a telecommunications company and a petrochemicals refiner.

Monetary Freedom79.7 Back to the top

Inflation is low, averaging 2.6 percent between 2005 and 2007. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. The Ministry of Finance can fix prices, set minimum or maximum commercial transaction prices, and establish periods when prices may not change. Energy, some raw materials, domestic rents, and rail and bus transport are subject to controls. Maximum prices apply to mail and telecommunications tariffs. Ten points were deducted from the Czech Republic's monetary freedom score to account for these policies.

Investment Freedom70.0 Back to the top

The law treats foreign and domestic capital equally. Foreign investors can establish joint ventures and participate in existing enterprises, with 100 percent foreign ownership allowed in both cases. Licensing is required for sectors, such as insurance, media, and energy, where the state is a partner. There are no restrictions on payments or current transfers, and residents and non-residents may hold foreign exchange accounts. Non-transparent procurement discourages foreign tenders for government contracts. Foreigners may not purchase land, but branches or offices of foreign companies may buy local real estate, except for farmland or woodland.

Financial Freedom80.0 Back to the top

The Czech Republic's financial sector is one of Central and Eastern Europe's most advanced, and intermediation has become even deeper since 2006. As of June 2007, there were 37 banks. The state is a controlling shareholder in two banks. There are few or no restrictions on foreign banks, and foreign-controlled banks accounted for over 90 percent of assets in 2007. Insurance companies and pension funds are competitive, with significant foreign and EU participation. By mid-2007, there were 52 insurance companies. Capital markets are small and lack transparency, but regulatory bodies have been merged to streamline oversight.

Property Rights70.0 Back to the top

All forms of property rights are protected by law. Contracts are generally secure. The judiciary is independent, although decisions may vary from court to court. Commercial disputes can take years to resolve. Company registration is in the hands of the courts and can be slow and complicated.

Freedom From Corruption52.0 Back to the top

Corruption is perceived as significant. The Czech Republic ranks 41st out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Convictions for bribery result in long prison terms. Allegations of corruption most often involve the court-controlled company registration system and the police. The Czech Republic has ratified the OECD's anti-bribery convention and has signed (but not ratified) the U.N. Convention Against Corruption.

Labor Freedom67.8 Back to the top

Further reform of relatively flexible labor regulations would create more employment opportunities and productivity growth. The non-salary cost of employing a worker can be high, but dismissing a redundant employee is relatively inexpensive.