How strong is the Tatra Tiger?

Image: Chairman of Smer-SD Rober Fico. Source: SME
On June 17, Slovaks cast their votes in the general election. With 30 percent of the vote, the left-wing Smer-SD won. Smer means direction and SD stands for social democracy.

In the past four years media named the small country “Tatra Tiger” after the mountains it lies under and economic performance it has achieved. The 2002-2006 government led by the center-right SDKU (Slovak Democratic and Christian Union) indeed implemented neo-liberal reforms and launched a period of macroeconomic success.

SDKU, having received only 19 percent in the recent elections, had to give up its position to the left-wing party. The election results have immediately attracted large international press coverage, eager to conclude that Slovaks have chosen to divert from the reform path.

Are Slovaks underestimating the achievements of their country as a European “reform leader”? Certainly not. They do not reject the reforms en bloc. They have just uncovered a bigger picture beyond the reforms’ upsides, one that is often overlooked: Neo-liberal reforms have their losers and the tiger still has weak points. The state has to come back in.

The birth of a tiger

The SDKU-led government successfully carried out some important structural reforms. The progress is most often voiced as the rapid growth of the GDP: In 2005, it was 5.5 percent, much higher than aggregate European Union’s 1.7 percent. Slovakia’s average for the 2001-2005 period was 5.3 percent.

The tax reform introduced a 19-percent flat rate, reducing taxes for big businesses and making tax collection more transparent. The privatization of healthcare resulted in gradual reduction of its exorbitant debt, while increasing efficiency in management. Earlier than most of the ageing Europe, Slovakia launched the pension system of private accounts. And thanks to the welfare system reform, the unemployed now get a fishing rod instead of fish. “Rather than one of the Europe’s problems, Slovaks are now seen as problem-solvers,” enthusiastically commented The Economist.

These initiatives have brought about higher rates of growth and a more balanced budget. The unemployment fell from 18 percent in 2000 to 11 percent in 2005. The increasingly business-friendly environment attracted an unprecedented amount of foreign direct investment. Recently, Hyundai/KIA and PSA Peugeot Citroen built new production plants “from scratch,” joining the well established Volkswagen. By 2008, once all car factories start working on full throttle, Slovakia will be world’s number one in car production per capita. The Tatra Tiger was born.

The losers

The much-celebrated reforms have hit hard on the low-income groups and retirees. Fees for health services and medication increased. To make the tax reform fiscally neutral, the government increased the added value tax on food and other necessities from 15 to 19 percent. The market-oriented World Bank, International Monetary Fund, and the European Commission kept praising Slovakia. Somehow, however, the living standard of the average Slovak Joe did not change accordingly. As a way out of this dichotomy, he chose to vote left.

The negative impact of the reforms should be seen in a wider socio-economic context. The truth is that due to the welfare system reform combined with other reforms, the poorer half of the population suffered a shock stronger than ever earlier. Similar cuts in welfare were carried out in the early 1990s as a result of abandoning the communist economic management. However, the 1990s were still marked by a relatively generous welfare state. But under the 2002-2006 government, in a short time period, welfare-wise, Slovakia shifted from a legacy of communism to exemplary neo-liberalism. The post-communist feeling of constant socio-economic uncertainty intensified the shock.

Iveta Radicova, one of my college professors in Bratislava and a social policy expert, used to emphasize that every reform has its winners and losers. In 2005, she quit teaching to become the minister of social affairs and continued the welfare system reform her predecessor had launched. She carried on the restructuring, but also advanced policies aware of the losers. She raised pensions for the retirees in the unreformed pension system and benefits for the most needy. Although this can be seen as giving out sugar before the election, it is also an example of loser-aware reforming. For the most part of the reform period, this was not the case. The tiger’s problems go beyond losers’ concerns. The tiger is not as strong as it may seem.

Tiger’s weak points

The GDP growth is high, but the GDP itself is still small. The Tatra Tiger’s GDP (purchasing power parity) per head for 2005 was $15,731. The EU average held at $28,100. An unfair comparison? Let us go to Central Europe: Czechs lead with $18,243 and Hungarians follow with $16,296. Together with Poland, Slovakia comprises the poorer half of the region. Arguably, the reformers had a bad starting position. Slovakia’s economy, unlike the others in CE, did not abandon all of communist management in the early 1990s, but rather in the early 2000s. Still, there are other challenges the SDKU-led coalition had power to tackle.

First, the country’s regions have been developing unequally. While Bratislava thrives and shines, with a lot of construction going on, local rule of the thumb is that the further east one goes, the poorer places one finds. While the GDP of Bratislava is 16 percent higher than the EU average, eastern Slovakia accounts only for 39 percent of the average, being one of the poorest regions in the Union. The big businesses that came into the country have followed the pattern and settled mostly in the western and central parts.

Second, the state has been giving generous incentives to foreign investors. KIA and PSA alone were supported with $410 million. Big businesses produce a significant part of Slovakia’s GDP, advance technological modernization, and employ many. A modern economy, however, relies equally on small enterprises due to their flexibility. Some analysts argue that small entrepreneurs could have created as many jobs as the two giants, had they been given equal investment stimuli.

The third unaddressed issue is lack of production diversification. Being on the top of the world car production is impressive. It is less impressive, however, that the economy is becoming increasingly dependent on a single industrial sector. In 2004, the car industry accounted for 31 percent of Slovakia’s export. In 2005, the share fell to 18.5 percent due to the redesigning of the Volkswagen plant, but it is expected to soar in the upcoming years, as all plants start producing on full scale. Should one of the three automotive mega-businesses perform poorly in the future, the entire economy will shatter.

Moreover, the plants in Slovakia mostly do not produce the high-tech components, but rather import and build them in. Workforce required is either low- or mid-qualified and therefore easily replaceable. Russia also has flat tax. Provided it grants a more stable and less corrupt economic environment, the large transnationals will probably not think twice before moving the production eastward. Slovakia therefore needs more high-skilled workforce to host the foreign employers over the long term. The automotive industry has a potential to create such jobs. But first, it needs an educated workforce.

Unfortunately, the Slovak tertiary education system is experiencing a slump. Not only the management of education is inefficient, but the actual funds allocated are scarce as well. A bill aimed at rationalization of spending did not pass in parliament due to splits in the ruling coalition. In 2005, Slovakia ranked fifth from the bottom out of OECD countries both in the terms of government expenditure per college student and funding of the education system as a percentage of GDP.

The mission of the new government

The reform policies and Slovakia’s new image abroad are highly favorable. Nevertheless, at least 30 percent of the voters think they did not profit from the reforms. Should they be more patient? A good government has to serve the future, but equally also the present generations. A loser-aware aspect of reforming was neglected and Smer-SD speaks the voice of the losers.

A tiger was born in Central Europe, indeed. But it is still a cub – small and vulnerable. Slovakia’s GDP is comparably low, regions are developing unequally, and the economy is big-business based and car-industry dependent. Slovakia not only fails to create high-tech jobs, but also fails to educate enough people to transform itself into a knowledge-based economy.

Smer-SD, a pro-system party, is a better option to compensate the losers of the reforms and point to the economy’s omitted shortcomings. Better than an anti-system populist who could eventually kill the reforms totally and turn against capitalism, neither of which is not entirely impossible in a post-communist country.

The larger lesson here is that after a concert of neo-liberalism there is a renewed demand for the state. In a post-communist country with weak civil society, it is the state that is viewed as the safety net. Moreover, it is the state that has to address the issues that the market does not have a motivation to address. The Slovak state should foster balanced regional development, economy’s flexibility and diversification, rise of high-tech industry, and tertiary education. Only at the condition that the future government deals with these issues, Slovakia’s economy will be able deliver higher living standard to most citizens and succeed in the global competition.

AUTHOR’S NOTE:

Most of this article was written before Smer-SD formed a government with HZDS and SNS on July 2, which, as many economists point out, may be the worst option for Slovakia’s economy. HZDS and SNS ruled from 1994 and 1998 and almost bankrupted the treasury and scared off foreign investors by mismanagement. This article aspired to explain Slovaks’ vote for Smer-SD and sketch out some important issues the new government should face. Given Fico’s decision to ally with the nationalist HZDS and SNS, the chances that this coalition will address the mentioned problems by sustainable policies decline. The article does call for the return of state, but an outward-oriented and competent state in the most basic sense of the words.