Instructions for action: Slovakia’s reforms (Part 1)

In the early 1990s, Slovakia was a corrupted and extremely poor country. In 1994, it was denied entry to the Organization for Economic Cooperation and Development and the European Union. However, in 2002, it became the European leader of reforms and the “economic tiger of Eastern Europe”, reports “Investor”.Slovakia, having separated from the Czech Republic in 1992, has, along with independence, received a number of economic problems. After the collapse of the USSR, the Slovak economy was mostly maintained by steel industry, the military industry and the Slovnaft in Bratislava. However, these plants depended heavily on the supply of raw materials from Russia and Ukraine.

Slovnatft Refinery in Bratislava (modern view)

In the spring of 1998, Slovakia was compared to Belarus and Serbia. US Secretary of State, Madeleine Albray, called Slovakia at that time the "black hole" of Europe. Slovakia’s
experience is important for Ukraine because these countries have similar conditions of post- Soviet development. Slovakia is an example of how quick and decisive reforms can to change the situation.

One of the most important reforms were tax, financial, pension, medical, social. In 1993-1999, the country received 2.4 billion dollars of foreign direct investment, and over the next seven years – ten times more – 23 billion. Slovakia, which had not previously had its own automobile industry, became one of the world leaders in the issue of cars per capita. What is the secret? We will not go into detail but concentrate on the main ideas and achievements.

Building of the Parliament of Slovakia

Tax reform has become a kind of marketing move in order to attract investment. Instead of a large number of unclear taxes, a fixed income tax was introduced – 19% (formerly from 10% -38%) and 19% for VAT. However, the state was concerned that those who used to pay 10% would not pay at all. They removed all special tax conditions. Thus, the government reduced and normalized taxation, which gave immediate results – attraction of new investments, business came out of the shadows.

Financial reform is the complete transparency of budgeting through the introduction of the European System of Accounts (ESA). The Agency for Debt and Liquidity Management was set up to regulate and successfully manage government debt. The state budget of the Ministry of Finance has been dramatically reduced by 30% (599 employees instead of 849).

One of the important decisions and achievements was to redirect financial revenues from the center to the regions. For example, in 2005-2012, local communities (the lowest level of budgeting) received 70.3% of their income tax to their budgets, 23.5% of this tax went to the accounts of self-governing regions (higher level) and only 6.2% – to the state budget.

Financial Center of Bratislava

The pension reform was multi-vector. In addition to the traditional European practice of increasing the retirement age, it contained instruments of incentive for citizens and made
them worry about their retirement. They wanted to create a three-level system. Where there is a voluntary cumulative (not taxable in case of death, passed as an inheritance), acompulsory cumulative (tied to inflation and salary growth) and compulsive cumulative (citizens could invest their money into funds managed by pension management companies).

Medical reform has fostered the competition of public and private health insurance clinics and has facilitated the transformation of hospitals into corporations or non-profit organizations. A basic healthcare package was created, which could be supplemented by additional funds. Harsh budget constraints have been introduced and excessive supply has been reduced (excess beds, overpriced costs).

Social reform was aimed at motivating people to find work. In 2002, Slovakia had the highest unemployment rate in Europe (18.5%), and in 2006 it dropped to 13.3%. It was due to the narrowing of the criteria for obtaining social payments and the reduction of taxes on the wage fund. The parental benefit for children was transformed into a tax bonus, but only for those who paid taxes.

Kia Motors plant in Slovakia

Slovakia had a tough starting point but was able to reform and attract significant investments. All was made possible through targeted and rigorous actions that were not always popularly accepted by the public, but brought results. Nowadays, Slovakia is attractive to such companies as Volkswagen, Peugeot, Kia Motors, Samsung, Sony, Whirlpool. For us, the reforms of Slovakia should be a guide to action. Only attracting investment and creating an attractive financial climate can change the economic situation. To begin with, we don’t need much, just equal and understandable conditions for everyone on the market.

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