Books on Slovakia
% of GDP
Update No: 108 - (30/05/06)
Slovakia is dominated by a pre-electoral frenzy. It is, like
the Czech Republic, holding crucial parliamentary elections in June.
The government is in peril. At that point unusual ideas come to the fore. Its
previous populist leader, Vladimir Meciar, is making a comeback.
The unthinkable becomes thinkable
Its right-wing parties were once unified in their opposition to cooperating with
former PM Vladimír Meciar and his Movement for a Democratic Slovakia (HZDS)
party, but recent approaches by PM Mikuláš Dzurinda's Slovak Democratic and
Christian Union (SDKÚ) and the conservative Christian Democratic Movement (KDH)
have shown that attitude might be changing.
The KDH must still get over a grudge it bears against the former PM for issuing
'cover-up' pardons that have prevented the investigations into several criminal
cases from ever being concluded. But Dzurinda's SDKÚ has already mentioned the
possibility of forming a coalition with the HZDS, and even with Meciar, as part
of the post-election government.
SDKÚ's Iveta Radicová, who also serves as Labour Minister, explained the
change by stating that party programmes, rather than personalities, are what is
SME agrees that Meciar's pardons effectively spelled the end for certain
investigations, but holds that the biggest cases remain open. However, while the
investigation into the kidnapping of Michal Kovác Jr, the former president's
son, has been prevented by Meciar's amnesty as an MP, the murder case of Robert
Remiáš, a go-between to Oskar Fegyveres, who allegedly witnessed the
kidnapping, has yet to see a courtroom.
Political analyst Samuel Abrahám admits Meciar by his very opposition held the
current minority government together, but believes his participation in a new
ruling coalition would be a "moral tragedy."
One thing, however, that any long-time analyst of Central European affairs could
note, such as the present writer, is that Meciar left power in 198, bowing to
the popular verdict. He is a villain, but not quite in the Milosevic class. He
started no war, nor did he fix the vote, otherwise he would not have left.
Nor is he like Lukashenka in Belarus, a dictator who will not lightly give up
power, who does not even need to fix the vote, but does so all the same.
The fact that he accepts democracy is now the key. He is prepared to co-operate
in a subordinate role in a coalition. Given his genuine popularity in the
countryside, it could be a sign of democratic maturity to allow his party to
enter a new coalition, albeit the legal cases should certainly continue. But the
lurid memories of his former opponents, since then the ruling coalition, may
just be too strong to allow that to happen.
The Slovak model
Slovakia changed course dramatically in 2003, with the result that it is now
being widely touted, notably by Bush, as a model of economic reform.
The main issue is that of taxation, central to all thinking about economics
since before Adam Smith.
The pre-reform tax bedlam
"Complex" does not begin to describe the shortcomings of
Slovakia's former tax code. It flouted every one of Smith's prescriptions for a
successful tax system, that it be fair and be seen to be fair, that it be simple
and non-arbitrary, that it be quite clear and that it be workable.
On the contrary it had five tax brackets ranging from 10 per cent to 38 per
cent; 90 different exemptions; 19 unique sources of tax-free income; 66 items
that were themselves tax- exempt; and an additional 27 items that carried their
own particular tax rates.
A split value added tax (VAT) taxed some items and services at 14 per cent,
others at 20 percent, which made the code even more pretzel-like. Confusion
reigned because tax laws changed twice a year.
Not surprisingly, countless citizens avoided the tax system altogether.
Slovakia's shadow economy accounted for a high percentage of the country's
actual economic output. Slovaks had little incentive to create domestic capital
because of onerous tax rules. And foreign investment would not come rolling in
Flat tax introduced
Government leaders knew something had to be done to address this
growth-suppressing mess. In October 2003, parliament passed a flat tax reform
bill that was initially vetoed by the president, Rudolph Schuster.
Parliament overrode the veto in December. This reform bill unified and
simplified the Slovakian tax regime, creating one rate across the board. The
personal income tax, the corporate income tax and the VAT, were all set at 19
Personal income taxes dropped for almost all Slovaks. Those at the high-end of
the income scale have seen their highest tax rate fall from 35 per cent to 38
per cent down to 19 per cent. The flat tax avoided a tax increase on lower
income taxpayers by including a personal deduction of US$2,600; this exempted
half the average yearly wage in Slovakia. The previous personal exemption was
The new law reduced the perverse incentives that had driven so much of the
economy into the informal sector. As tax rates were slashed and simplified,
individuals and businesses began to emerge from the shadows. The government
projected that it would maintain its current level of revenues despite the cuts
in tax rates. It did even better: Tax collections soared by 36 per cent,
shrinking the budget deficit by 93 per cent in the first quarter of the new
The country was beginning to see a dramatic increase in foreign direct
investment. The New York Times, for instance, dubbed Slovakia the "Detroit
of Europe" because of contracts for new facilities for Hyundai-KIA and
Peugeot. These agreements brought billions of dollars of investment to Slovakia
for new manufacturing plants that employed thousands of Slovakians. By
attracting businesses with its very competitive tax system, Slovakia hopes to
become a beachhead for capitalism's spread across central and eastern Europe.
When international automakers signed billion-dollar agreements to relocate
manufacturing facilities to Slovakia, the nation proved it had embarked on the
same kind of journey that had transformed Ireland from an economic laggard into
the economic dynamo it is today.
In drastically lowering taxes, Slovakia and its fellow Baltic states will likely
follow in the footsteps of Ireland, which has become the economic model for many
central and eastern European counties. Decades ago, Ireland adopted an
aggressive corporate tax-reduction policy in order to attract investment and
serve as a platform for businesses targeting Continental Europe.
Many American companies saw this English-speaking island as an ideal jumping-off
point for their business invasion of the rest of Europe. Ireland cut business
taxes. In the 1980s, to counteract an economic slide, it cut taxes, especially
on personal income, even more. It worked. Ireland earned the nickname
"Celtic Tiger" as a result of its ability to attract foreign
investment and market itself as a location where corporations could thrive.
Ireland's per capita income is now higher than that of Great Britain.
Czechs attract 17 times more FDI than Slovakia in 2005 due to pre-electoral
Nevertheless, the influx of foreign direct investment (FDI) to the Slovak
economy slowed dramatically in 2005. According to the Slovak central bank,
foreign companies invested Sk20 billion in the country last year, down 35 per
cent from 2004. In the neighbouring Czech Republic, on the other hand, FDI
doubled in 2005 to reach Sk346.5 billion, the Hospodárske noviny paper wrote.
According to analysts, the drop in FDI to Slovakia is mainly due to the fact
that less was privatised. "Virtually no state property was sold last
year," said Miroslav Šmál, an analyst with Poštová banka. "The
slowdown could also have been caused by the replacement of the economy
minister," he added.
Šmál also faulted the Slovak Agency for the Development of Investment and
Trade (SARIO) and the Economy Ministry for not cooperating well on attracting
investors to Slovakia. "SARIO fails primarily in its initial contacts with
investors," the analyst said.
Analysts estimate that FDI should reach Sk20 billion this year as well. Higher
investments are being held back by the fact that Slovakia will hold national
elections in June, and that the front-running leftist opposition parties have
said they will roll back some of the right-wing Dzurinda administration's
"Investors are waiting to see how the elections turn out, which is why they
are speculating a bit in deciding where to locate their operations," said
Štefan Lednár, the general secretary of the Slovak industrial union.
Bratislava airport sees 92% growth
The number of passengers travelling through Slovakia's largest airport, MR
Stefanik in Bratislava, increased by 91.6 per cent year-on-year to 332,143
people in the first three months of this year, Slovak spectator reported.
Another 11,120 people were served at the airport as transit passengers. The
airport reported 310,521 people on international flights, representing 94 per
cent of all passengers. SkyEurope Airlines occupied first place among air
carriers with a 52 per cent share on the total number of transported passengers,
followed by Ryanair with more than 24 per cent. From April 2004 to March 2005,
the airport reported 1,485,302 passengers, amid a boom in travel helped by
low-fare airlines and growing passenger travel.
Slovakia to join IEA by start of 2007
Slovakia should join the International Energy Agency (IEA) at the beginning of
next year at the latest, Economy Minister, Jirko Malcharek, told a news
conference following his meeting with IEA Director, Claud Mandil, recently,
Slovak Spectator reported.
The conditions that Slovakia must meet before entering the IEA include
statistical reporting on the balance of fuels, electricity and heat and
emergency supplies of crude oil. According to the document "Slovakia's
Energy Policy Review 2005 - IEA, the energy situation in Slovakia has undergone
some very positive changes. Slovakia has implemented impressive energy reforms
recently, a unique performance in central and eastern Europe," Mandil
stated. According to an IEA analysis Slovak households still spend 10-15 per
cent of their income on energy compared to six per cent in Germany, the Pravda
daily wrote. The IEA is a specialised agency of the Organisation for Economic
Cooperation and Development. It focuses on improving the structure of global
energy supplies and demands, efficient energy use and the development of
alternative energy sources. The body currently has 26 members. The news was seen
as a positive development by government officials.
Slovnaft to pay out 7.8bn in dividends
At an annual general meeting recently, the shareholders of crude oil refinery
Slovnaft agreed to pay dividends of 377.5 Slovak crowns per share for last year,
representing 37.75 per cent of the par value of each share. In total Slovnaft
will thus pay out 7.8 billion crowns (207.3 million Euro) in dividends, Slovak
Last year the refinery's net profit was 8.7 billion crowns on output of 93.2
billion crowns, which was a 23.3 per cent growth year-on-year, the news agency
wrote. Sales exceeded 17 billion crowns, and the company generated added value
of 17.6 billion crowns, a decrease of 8.4 per cent year-on-year.
Companies invest 237m in Croatia
In 2005, Slovak companies invested 237 million Slovak crowns (6.3 million Euro)
in Croatia, investing 187 million crowns of it in the business sector and 50
million crowns in the financial sector, said Economy Ministry State Secretary,
Eva Simkova, in Bratislava, TASR News Agency reported.
For the same period, Croatia, which has 4.5 million people compared to
Slovakia's 5.4 million, invested 48 million crowns in Slovakia, ending in 40th
place among investors to Slovakia last year. Simkova and her Croatian
counterpart, Vladimir Vrankovic, agreed that Slovak-Croatian economic
co-operation still has some imperfections. In addition, both countries are
interested in improving not just trade but also the amount of inter-country
business relations, they added. In 2005, mutual foreign trade turnover was
US$186 million, with Slovakia enjoying a trade surplus of US$68 million.
Slovak ski resorts plan huge investments
Winter ski resorts that have joined forces and formed an association called
Slovakia Ski Region plan to invest at least 1.5 billion Euro (55 billion Slovak
crowns) in the next five years and create around 20,000 jobs, Slovak Spectator
The operators of the largest winter ski resorts in Slovakia - Tatranska (which
runs the ski resorts Park Snow Donovaly and Park Snow Vysoke Tatry), Snow
Paradise Velka Raca Ossadnica, Tatranske Lanove Drahy, and Jasna Nizke Tatry -
have also called on the government to support the development of tourism in
The ski resorts also agreed on a joint marketing strategy for Slovakia. One
concrete measure of this strategy is a joint ski pass for all ski resorts for
the next winter season to entice more skiers and tourists to visit the country's