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Transitions Online article part one

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  • nhasior@aol.com
    From Black Hole to Leading Light  page 1 of 2    by Olga Gyarfasova 6 October 2004 How Slovakia transformed itself from a “black hole” to an
    Message 1 of 3 , Oct 7, 2004
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      From Black Hole to Leading Light
       page 1 of 2   

      by Olga Gyarfasova
      6 October 2004

      How Slovakia transformed itself from a “black hole” to an investor’s
      paradise.

      BRATISLAVA, Slovakia--Slovakia has done more than any other country to
      improve its business environment in the past year. That, at least, is the judgment
      of the World Bank: in a report produced on 8 September, it lists Slovakia as
      one of the 20 most business-friendly of 53 developing countries surveyed.
      Cumulatively, reforms conducted over the past two years could add 2.5 percentage
      points to the Slovak economy’s annual growth. Already, the World Bank argues, the
      reforms have created more jobs for women and reduced the size of the black
      market.

      A decade ago, Slovakia was unused to receiving such positive messages from
      abroad. Some seven years ago Madeleine Albright, then U.S. secretary of state,
      called Slovakia a “black hole in the heart of Europe” and Bratislava was
      criticized on several occasions by EU and U.S. diplomats, who pointed particularly
      at Slovakia’s “democratic deficit.”

      Both sets of messages might be exaggerated, even hyperbolic. Nonetheless,
      they illustrate the transformation that Slovakia has undergone internationally as
      well as domestically. In the mid-1990s, Slovakia was the worst example of
      transition in Central Europe; now, many foreign analysts and politicians cite it
      as a model for economic reforms. The Washington Times called the new Slovak
      tax system “one of the best systems in the world” and many analysts,
      politicians, and businesspeople compare Slovakia to Hong Kong and Ireland. How has
      Slovakia managed this immense change, from the black sheep of Central Europe to a “
      Tatra tiger”?

      HOW REFORMISTS CAME TO THE FORE

      For years after Czechoslovakia split up in 1993, Slovakia lagged far behind
      its Visegrad neighbors. While the Czech Republic, Poland, and Hungary became
      sophisticated, albeit immature democracies with strong reformist parties leading
      them swiftly toward the EU and NATO, Slovakia was stuck on the track. Ruled
      by a coalition of nationalists, post-communists and other authoritarians under
      Prime Minister Vladimir Meciar, Slovak political debate was reduced to a
      battle over the elementary principles of democracy and the rule of law, and whether
      it should look West. State assets were literally given away to Meciar’s “
      domestic capital-producing class.” (According to the National Property Fund's
      Black Book of Privatization, which was published after the 1998 election by the
      administrator of state property, state-owned assets sold in 1997 fetched only
      18 percent of their market value and 23 percent of their accounting value.)
      Economic reform was not even debated.

      The government that replaced Meciar after the general election in 1998 was a
      broad coalition of socialists, liberals, and conservatives. Their shared goals
      were not structural reforms, but the basics of restoring democratic
      principles and a clear pro-Western orientation for the country. As a result, the
      government of Prime Minister Mikulas Dzurinda completed only a few vital reforms (to
      the constitution and civil service) between 1998 and 2002.

      While the general elections in 2002 again produced a patchwork coalition,
      they were a key moment: these were the first elections in Slovakia in which the
      difference between socialists and liberals in economic terms had some
      significance. This time, Dzurinda’s Slovak Democratic and Christian Union was able to
      form a central-right reformist government, drawing on the support of the
      Hungarian Coalition Party, the Christian Democratic Movement, and the Alliance of
      the New Citizen. For the first time, Slovakia found itself with a coalition of
      partners with similar political agendas. Although the coalition has enjoyed
      only a narrow majority in parliament and has been driven by conflict and
      scandals, the common stance on key issues has been enough for the government to
      proceed with fundamental economic and social reforms.

      THE RATIONALE BEHIND THE REFORMS

      Reformists seized the moment. Disappointed with the feebleness of the reforms
      conducted by Dzurinda’s first government, they saw the new government as a
      new opportunity.

      The intellectual dynamic shaping the four coalition parties’ philosophy on
      social and economic issues originates in a strong reformist intellectual elite
      gathered in some think tanks, nongovernmental organizations, and newspapers.
      The drive toward free-market principles is perhaps even stronger than in Western
      Europe, as many people automatically shifted their opinions as far from a
      socialist standpoint as possible. As a result, the reforms were all based on
      neo-liberal ideas and supply-side economics. Furthermore, the government’s ongoing
      privatization drive is based on the credo that the state is the worst
      proprietor.

      Consider tax reform, for example. The key aims of the changes introduced by
      the charismatic young finance minister Ivan Miklos were simplicity,
      evenhandedness (or “neutrality” in the economic lexicon), and efficiency. Miklos
      eliminated progressive income taxation--tax that varies according to income--as well
      as the two different tiers of the VAT, replacing them with a single flat
      income tax of 19 percent and a single VAT rate. Provisions aimed at boosting social
      equity included raising the standard deduction for individuals and married
      couples.

      Many loopholes were closed in order to make the new system neutral and,
      thereby, to end de facto subsidies to certain sectors. And since one of the reform’
      s key points was to avoid duplicity, a whole series of taxes were completely
      eradicated--the inheritance tax (often ironically referred to as “death tax”),
      a tax on gifts, the real-estate transfer tax, and the dividend tax, a move
      particularly appreciated by foreign investors.

      Similar principles underlie the changes in labor laws and the pension system.
      Labor laws were tightened to motivate the unemployed to seek work and
      adjusted to reduce the black economy. The unemployment rate is, indeed, now slowly
      declining.

      The reform of the pension system addresses a problem that every European
      government is having to face--an aging population—but is rated as among the most
      progressive any European government has yet undertaken. Like other countries,
      Slovakia’s old system was based on the principle that workers pay the pensions
      of retirees. The new “three pillar” system more or less retains this
      pay-as-you-go model but adds two other pillars. In the second pillar, employees must
      set aside money in personal accounts administered by private companies. Their
      pensions therefore partly depend on their wages. The third pillar is voluntary,
      allowing people to put additional money aside in private accounts.

      Health-care reform, which passed through parliament--surprisingly
      smoothly--very recently, also institutes enormous changes. Patients must now partly cover
      the costs of many medicines and non-life-threatening medical services. Some
      opponents argue that this infringes the constitutional right to free health
      care. Advocates of the reform respond that patients also had to pay for medical
      services in the past, only then the payments were in the form of bribes.
      Moreover, health-insurance companies will compete on an open market, and state-owned
      insurers will be transformed into joint-stock companies, potentially opening
      the door to private investors.









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    • Janet Kozlay
      This is very good news indeed. Thank you for sharing it with us. When we were there in 2002 I was mostly impressed with how poor the country was and despaired
      Message 2 of 3 , Oct 7, 2004
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        This is very good news indeed. Thank you for sharing it with us.

        When we were there in 2002 I was mostly impressed with how poor the country
        was and despaired because so many people expressed the opinion that they
        wished the Russians would come back because then everyone had a job. The
        country still seemed very "Eastern" oriented, with many monuments remaining
        from the days of Soviet domination, especially praising them for having
        liberated Slovakia from the Nazis.

        Our young friend from Kosice had a "job," but went for many months without
        getting paid! She tried to take her employer to court, but he pled that he
        didn't have the money and they let him go. His income was mostly under the
        table. After months of unemployment, she finally got another job, but it
        pays very poorly.

        The country was preparing for elections during our visit, and we were
        especially amused by one candidate in Banska Bystrica who was using Western
        country music to attract voters.

        One area of possible economic growth that is being largely ignored is that
        of tourism. The very few websites where you can find any information seem
        to concentrate only on skiing, and the websites are often down. There seem
        to be quite a few people on this list who have expressed an interest in
        visiting Slovakia, and there must be many more out there. I think the
        country could do much more in terms of attracting these people, especially
        by providing translation services and tours outside of Bratislava. We
        encountered relatively few people who could speak English. Fortunately we
        were able to make arrangements to have a translator, but it was very
        difficult finding her.

        Janet
      • nhasior@aol.com
        Tourism really is a consideration. someone had mentioned that the Slovak websites mainly concentrate on the areas of ski vacations. I am sure that, other than
        Message 3 of 3 , Oct 9, 2004
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          Tourism really is a consideration. someone had mentioned that the Slovak
          websites mainly concentrate on the areas of ski vacations. I am sure that, other
          than places which provide entertainment or religious significance, it is
          difficult for residents of small Slovak villages to understand the interest which
          people have in them. Helene C. is one of the few people who organize tours for
          people which give to visitors the opportunity to see their ancestral villages
          as part of the larger tour. Since Helene can communicate in Slovak, she can
          explain to the residents the interest in their villages for its own sake.


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