The success of small business determines the long-term health of a national economy. Countries with stable growth tend to have thriving small business sectors contributing 50 percent or more of the gross domestic product (GDP), and employing up to 70 percent of the working population. A constellation of small businesses increases the competitiveness and flexibility of an economy and helps absorb the sudden flameouts of large industries due to changes in technology and geopolitics.

Despite recent record growth, the Czech Republic has yet to establish a strong small-business sector. Small business accounts for only 35 percent of GDP, and this number has been stagnant for the past few years. Part of the reason is simply time; we are still midway through an economic transition away from a centralized economy that was dependent on heavy industry. Part of it, however, is the policy approach of the government, which is a hangover from the "bigger is better" days.

By definition, big businesses operate in predictable industries. By shaping regulations and providing subsidies to encourage or discourage behavior, governments can push desired outcomes with some certainty.

The world of small business is much more chaotic. Specially crafted policy can result in unexpected reactions and, due to the sector's variety, policy solutions demand a complexity that leads to over-regulation. Small-business subsidies are usually more effective as tools of political patronage than as economic stimuli.

Paradoxically, small business requires broader policy measures than big business. What is essential is the competitiveness and fairness of the business climate. The judiciary must be made more efficient, permit offices less corrupt or incompetent and, critically, the tax and social systems must be affordable.

The Czech Republic has made great progress in the past year in making the judiciary more predictable and fair. Commercial registry reform has cut the number of days needed to register a business. The number of days still remains far above those required by law, and the situation varies according to the district and the individual judge. Since the law places clear limits on the time necessary, this difference stems from the ability of courts to implement the law. The Justice Ministry intends to help by creating an electronic registry, which would enable small businesses to register without making a trip to a neighboring town. The ministry might also consider publishing the registration results of each region and each judge; in this way, small businesses could better select where to open up their business.

Compared with the progress made in registration, the application of regular commercial law is still uneven at best. Most small businesses would rather swallow their loss than subject themselves to the seemingly arbitrary behavior of the court system. Many small businesses say that going to court means waiting an excessively long time for an uninformed decision. Delays in rulings are, unfortunately, a problem worldwide; given the condition of the state budget, arbitration may be the only short-term solution. As for judicial expertise, a mandatory requirement that judges keep abreast of new laws would not threaten the judge's independence, but heighten credibility. Even making continuous education mandatory, however, does not make it good. The business community can help here by making sure the courts have access to the best experts available.

The issue of corruption has been vehemently debated in the press, and grand promises have been made by every party entering the government. Clean hands have mostly given way to shrugging shoulders. New systems to prevent corruption cannot work without the political will to administer those systems. Ministers and mayors who have that will must fight department by department by rewarding those who stay clean and prosecuting those who do not.

Like the middle class, small business has been crushed between payroll taxes and rapidly progressive income taxes. Payroll taxes have forced many small businesses to be undermanned or to go off the books. A social net is necessary, but even the government claims it is being abused. For instance, the government claims that construction companies and other seasonal industries are ripping off the sickness insurance scheme by sending health workers home sick when business drops. Yet the government is also making a tidy surplus on the scheme (almost 29 billion Kč [$1.3 billion] over the past decade). Instead of fixing it, Parliament is about to extend the scheme. This benefits only the public budget and the profit margins of the abusers.

In the past six years, income has risen over 40 percent. The tax brackets have shifted up by less than 10 percent. The average wage earner now resides in the 25 percent tax bracket. So, despite claims of cutting taxes, the government has actually allowed the expanding economy to increase individual taxation. Coupled with the high VAT rate, which was meant to replace high income tax, not supplement it, the current tax policy has suppressed dramatically the creation of a working middle class. Such a middle class is what stimulates small-business growth. It is past time for tax policy to stop fixating on short-term public budget issues, and focus on what will ensure the health of the economy — and the viability of the public treasury — in the long term.

Given the political difficulty of the tasks described above, it is no wonder that political parties still champion handouts. Handouts can provide a flash of energy. They also delay an advanced credit market for small businesses by pushing aside private capital. That is why it might be better to replace direct subsidies with government guarantees. These guarantees could apply not only to bank loans, but also to venture capital forms of investments. In that way, the government could bring down the cost of capital for startups and rapidly expanding small businesses.

Furthermore, passing on the experiences of successful entrepreneurs, both buoyant and bitter, to the next generation will build up a core of entrepreneurialism. The wisdom of one successful entrepreneur is worth far more than help centers staffed by individuals who have never run a business. Mentor programs should be set up in every region and city in the country. The government could help support such programs by providing venues and circulating success stories.

The government could have been doing a more effective job of supporting the small business sector. Yet, small business has not yet organized itself into a coherent voice. Mostly it treats the government as a necessary evil to avoid at all costs, and then is surprised when the government remains a necessary evil. It is time for each side of this relationship to take the other more seriously and find solutions that work for both.