There is considerable regional variation in incomes and poverty in the Czech Republic and gaps have grown over time. With the highest number of municipalities per head in the OECD, subnational government is very fragmented and the resulting lack of capacity at the local level reduces the quality of public services and impedes the uptake of effective development projects. This paper discusses various policy options to address the challenges faced by Czech subnational governments and proposes reforms to enhance their effectiveness. Mergers of municipalities would be an obvious way towards greater integration, but this may be politically difficult. Mandating inter-municipal co-operation over a legally defined set of public services can be an alternative way of improving efficiency and the quality of service delivery. Tweaking the tax sharing system to disincentivise small size of municipalities and to make subnational governments more autonomous could be steps towards higher efficiency. Improving and consolidating the delivery of education and health services at the local level is also needed in the context of demographic change.