Slovakia has successfully passed through its political and economic transition. Although it was lagging behind other countries of Central Eastern Europe due to an authoritarian regime during the 1990’s, changes started to happen in order to catch other countries. Democracy has been consolidated and many structural economic reforms were successfully implemented. Slovakia soon became attractive for foreign investments and economy started to grow rapidly.
How has Slovakia passed through its political and economic transition? What can we learn from Slovak experiences? What is the legacy of its former Prime Minister Mikulaš Dzurinda and Deputy Prime Minister Ivan Mikloš? Do other countries need reform-oriented politicians?
The main thesis of the article is that Slovakia has benefited from its transition into a free-market economy through various structural economic reforms that were needed to be implemented, including successful tax reform. It can be example for other countries, including Croatia and other countries in South Eastern Europe.
SHORT HISTORICAL OVERVIEW
Slovakian history passed through various political and cultural influences. In the 9th century Great Moravian Empire covered its territory. In 1000 Kingdom of Hungary was established and it lasted till the end of Austro-Hungarian Empire. Through that period, Slovakia was influenced by cultural influences of the Ottoman Empire, Habsburg Catholicism and the national Protestant Reformation. The governing Hungarian nobility was in rebellion against the Habsburgs. Joseph II introduced many economic and social reforms, as well as religious tolerance. The 19th century was important for development of civil society and Slovak national movement was formed to counter Hungarians and Habsburgs. In 1918 democratic Czechoslovakia was formed. In 1938 Hitler’s Nazis occupied its territory, but Hungary and Poland also took some parts of the territory. In 1939 Slovak Republic was founded under Nazi control. In 1945 new Czechoslovakian Republic was established and communists took power under Soviet control until 1989 when dictatorship collapsed. Democracy was introduced and independence was declared in 1993. However, in the first period of the transition, Slovak political system moved towards authoritarianism.
TRANSITION FROM AUTHORITARIANISM TO CONSOLIDATED DEMOCRACY
After the fall of communism and gaining independence, Slovakia was in much harder position than its neighbouring countries. Without clear political perspective, Slovakia soon became an example of authoritarian regime, rather than developing democracy like Czech Republic. Slovakia’s application for EU and NATO membership was rejected in 1997.
According to Szomolányi, Freedom House put Slovakia in a category of “troubled democracies”, opposite of ‘procedurally correct’ ones (Czech Republic, Hungary, Poland and Slovenia). Slovakian political system was defined as an authoritarian regime, similar as in Croatia. Its political transition was more difficult than in other countries of Central Eastern Europe which transitions indicated a systemic change in the economy, political system, and political culture while heading towards democracy, the rule of law, functioning market economy. After 1992 elections, nationalist-populists led by Vladimir Mečiar prevailed and took control over the transition. The 1994 elections meant further political regression of Slovakia. „Having succeeded in establishing an independent Slovak state, nationalist elites sought to use the offices of the Slovak government to retain political power and control over the privatisation process while claiming to defend national sovereignty against internal and external “enemies”.
Due to political regression from the 1990’s, Slovakia needed to catch up with other candidate countries in closing negotiations with the EU, and also to harmonize its legislation. Judiciary reform was necessary to be implemented. Slovak economic competitiveness was lagging behind in labour productivity and it needed to increase it the share of value added in gross production. Disparities in regional development were high (Šikula, 2002).
Szomolányi argues that Mečiar’s period lasted until 1998 elections, when the broad ruling coalition led by Prime Minister Mikulaš Dzurinda pushed forward toward the Euro-Atlantic associations. In 1998 – 2002 Slovakia saw political changes and progress in democratic consolidation, after post-communist authoritarianism. The country’s international position improved and reforms were launched. „The population’s increased level of political maturity was undoubtedly influenced by the experience of personal confrontation with the arrogant ruling elite, which refused to launch a dialogue with the civic and interest associations“. 2002 elections continued to consolidate democracy when a centre-right government was formed. Extreme nationalist were eliminated from parliament. Slovakia reached broad political consensus on fundamental values.
LESSONS FROM SLOVAK TRANSITION
After gaining independence, there were predictions of Slovakia’s early economic collapse. Slovaks needed to find solutions. The true inspiration was found in economic thinkers such as Adam Smith and his proposal to reduce the government role in economy, which will maximize economic freedom. In crisis, responsible politicians are needed who are ready and able to implement necessary reforms“ (Oravec, 2006).
1998 election results supported change in direction and reforms were introduced. In 1998–2002 government period reforms worked to lead the country to the same level of development as other transition countries. After 2002 elections the government introduced an ambitious package of reforms in order to accelerate previous reforms. These reforms included acceleration of privatisations, tax reform, labour market and price deregulation, pension and health care reform, and partial reform of educational system. Fiscal decentralisation was completed. Business environment was improved due to elimination of administrative barriers. Instead of gradual changes, structural reforms need to be implemented as quickly as possible, despite the opposition from the populists (Oravec, 2006).
Tax reforms should aim to abolish (almost) all special treatments and different rates and broadening the base in order to make it simple, neutral and fair to all taxpayers. Simplicity and broadening tax base also means making the tax administration more efficient in collecting revenues. Introduction of flat tax also contributes to lower possibility of tax evasion.
Slovak centre-right government introduced the tax reform in 2004, including flat tax, in order to improve its economy and stimulate faster economic growth. Ivan Mikloš was a deputy prime minister and finance minister. In 2002 he faced urgent need for faster economic growth. His government found out that it needs to implement a wide range of deep structural reforms. The power of Slovakian tax system derives from efficiency and transparency. Like in other countries, previous Slovakian tax code was complex with various taxes, rates, deductions and exemptions. So the system produced administrative costs and difficulties to small and medium enterprises, while others, especially big and influential businesses were able to find legal ways to evade paying taxes (Srdoč and Anand Samy, 2005).
Slovak tax reform was created to reach three goals: 1. suitable business and investment climate for individuals and companies, 2. removing the existing weaknesses and distortions and 3. equal taxation of all sorts and amounts of income. So the progressive taxation system was replaced by lower flat rate, without any exemption and special regime. Also, tax burden was removed from direct to indirect taxes, from taxation of production towards consumption. The reform eliminated double taxation. As a result, the new legislation eliminated 21 various taxations of income and five progressive income rates (10–38%) and introduced a uniform 19% flat rate for personal and corporate income. Tax instruments aimed at achieving non-fiscal goals were eliminated. The Ministry of Finance claimed that the lower direct taxes stimulate investments and improve economic productivity (Goliaš, 2005).
Prime Minister Mikulaš Dzurinda and his Deputy Prime Minister Ivan Mikloš took a leadership in 2002 and political audacity to implement reforms of the tax system, education, health care, social insurance, privatisation of retirement insurance and 90% of state companies. In the 1990’s Slovakia was a „black whole of Europe“. In 2005 Slovakia joined the EU and its single market (Goliaš, 2005).
ECONOMIC FREEDOMS OF SLOVAKIA
In the Index of economic freedom, Slovakia was ranked 36th in 2009 with 69.4 points as a moderately free economy. Despite the independent judiciary, it takes time to resolve the cases. The reforms implemented by former Prime Minister Mikulaš Dzurinda have led to low labour costs, low taxes, and political stability, making Slovakia one of Europe’s most attractive economies. Slovakia has relatively flexible labour regulations and moderate non-salary cost of employment, but still rigid restrictions related to the number of working hours. Business freedom is high. It takes an average of 16 days to start a business. Overall tax revenue in GDP is 29.5%. 19% flat tax was introduced. Government spending amounts 37.7% of GDP and are still high, despite the reduction of state’s role in the economy. Investment freedoms as well as financial one are high. The state privatized all enterprises except railroads, postal services, water supplies and forestry areas. Bigger problems remain with corruption and property rights. Monetary freedom is high, with moderate inflation, but agricultural subsidies distort prices of agricultural products (Heritage Foundation, 2009).
Slovakia was ranked 26th in economic freedoms in 2007 with 7.52 points out of 10. Comparing with 2000 Slovakia improved its 2007 index by reducing government size, especially in the field of government enterprises which were mostly privatized, and in tax policy by reducing top marginal income tax rate. Payroll taxes remain constantly high as well as government consumption spending. Some improvement was made in the field of transfers and subsidies, protecting of property rights. Credit market was deregulated and banking system was privatized. It is easy to start a business. Labour market was relatively deregulated, especially regulations on minimum wage and collective barging (Frazer Institute, 2009).
MAIN MACROECONOMIC RESULTS
Slovakia reached its top economic results in 2007 when GDP grew by 10.3% (and 14.1% in the last quarter), which was the highest annual growth in the EU. Unemployment rate was decreased to 11.1% (18.8% in 2000). While the purchasing economic standard was only half of the EU average in 2000, it grew up to 67% in 2007 (Eurostat, 2010).
Exports grew 15.2% in 2007 and average gross wage grew by 7.2% growth. The first significant investment was Volkwagen automobile factory in the suburb of Bratislava. In 2006 Peugot Citroen arrived to Trnava and in 2007 Kia arrived to Žilina. Slovakia became known as „Detroit of the East“. Many multinational companies decided to invest in Slovakia (Blažej, 2009). Slovakia has became very attractive to foreign investors due to several advantages such as cheap and skilled labour force, flexible labour legislation, 19% flat tax and favourable geographical location.
After gaining independence in 1993 Slovakia started to lag behind comparing with other countries of Central Eastern Europe. It was due to the authoritarian regime of Vladimir Mečiar, a nationalistic populist president. 1998 election marked the beginning of the new era and Slovakia started with its democratic consolidation, structural economic reforms, European and transatlantic associations. That process continued even more rapidly after 2002 election when a centre-right government took power. Slovakia soon joined the EU and NATO. Reasons for rapid economic growth and rise of living standard can be found in structural economic reforms that were implemented in order to improve free-market economy. Slovakia soon attracted many foreign investments as well as many EU grant during its pre-accession and membership period. Slovaks have recently reached 70% of average EU’s purchasing power standard (higher than in Poland, Hungary and Estonia), and it is rapidly moving forward to reach the standard of Czech Republic.
It can be concluded that Slovakia’s former Prime Minister Mikulaš Dzurinda opened the way of political and economic transition with clear decisions about Slovakia’s future perspectives. His Deputy Minister Ivan Mikloš contributed with successful tax reform and other crucial reforms that stimulated foreign investments, employment and economic growth. Both Dzurinda and Mikloš proved that political will for strong decisions is crucial in order to improve democracy and advance economic freedoms.
Therefore, Slovak experience can be used in other transition countries as well as less developed countries, in accordance to specific circumstances. Slovakia is the example that reforms depend on political will of government. Also, reforms are the only alternative in order to ensure sustainable economic growth. It takes time and usually reforms may produce effects in mid-term period. In the meantime, government can lose elections because reforms are usually not popular. But the same government needs to take responsibility for sustainable future with means it needs to start implementing unpopular decisions as soon as possible. In Slovak case, there was not much time to think and wait.
Blažej, J. (2009): Slovakia: Cultural Profile – Economy
Goliaš, P. (2005): Slovak tax reform – one year after; Institute for Economic and Social Reforms
Oravec, J. (2006): What Can Learn from Slovakia’s Transition?; Center for International Private Enterprise: Economic Reform
Srdoč, N., Anand Samy, J.: The Flat Tax; IBS, 2005 (Ivan Mikloš: Slovak Tax Reform)
Szomolányi, S.: Slovakia – From a Difficult Case of Transition to a Consolidated Central European Democracy
Šikula, M. (2002): Economic and Social Contexts of Slovakia’s Accession to the EU; Institute of Slovak and World Economy, Slovak Academy of Sciences
Eurostat: Real GDP growth rate, 2000 – 2007
Eurostat, Unemployment rate, 2000 – 2007 http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsiem110&tableSelection=1&plugin=0
Eurostat, GDP per capita in PPS (EU-27 = 100)
Frazer Institute, Economic Freedom of the World; 2009 Annual Report
Heritage Foundation (2010); 2009 Index of Economic Freedom: Ranking the Countries
Heritage Foundation (2010); 2009 Index of Economic Freedom: Slovakia