Commentary

Tatra Tiger or a Return to Socialism?

This article appeared in the Financial Times (Deutschland) on June 16, 2006.

On June 17, 2006, Slovak citizens will head to the polls. The upcoming parliamentary elections will be the second most important since Slovakia’s independence in 1993. In 1998, the Slovaks had to choose between ending the autocratic rule of the then Prime Minister Vladimir Meciar and democracy. They chose the latter. This year they will have a choice between economic liberalism advocated by the current governing coalition, and populist socialism advocated by the left. The current government is far from perfect, but the alternative is much worse.

Since winning the 2002 election, the center-right coalition government of Prime Minister Mikulas Dzurinda managed to improve Slovakia’s microeconomic environment by eliminating many unnecessary business regulations. In 2004, Slovakia adopted a 19 percent flat personal income and corporate tax rate. The value added tax was unified at 19 percent. The dividend tax and most tax exemptions were eliminated. As a result of those reforms, Slovakia ranked among the top 20 countries with the best business conditions in the World Bank’s Doing Business in 2005 report.

Moreover, the pay-as-you-go social security system, which faced serious long-term financial shortfalls, was partially privatized. By January 2006, roughly 1.1 million people, or 50 percent of the eligible workers, opted for personal retirement accounts. Many more are expected to switch before the deadline of June 30.

Slovak macroeconomic performance improved as well. Cumulative foreign direct investment to Slovakia rose sixfold between 1998 and 2005. The list of foreign investors included a number of American blue chips such as Citibank, Ford, Motorola, U.S. Steel and Whirlpool. Much of the investment flew to the auto industry. South Korean Hyundai and French Peugeot are building factories in Slovakia and the country is expected to become the world’s largest car producer per capita by 2008.

Economic growth accelerated from a low of 1.5 percent in 1999 to 6.1 percent in 2005. By comparison, the Czech, Hungarian and Polish economies grew at 6 percent, 4.1 percent and 3.2 percent respectively. According to the Eurostat, a statistical agency, the EU economy as a whole grew by a mere 1.6 percent.

According to the Slovak Ministry of Labor, unemployment, which used to be one of the most pressing problems in Slovakia, fell from 18 percent in 2000 to 11 percent in 2005. Over the course of last year, real incomes per capita rose by 6.2 percent. Slovak purchasing power adjusted per capita incomes are higher than they have ever been. Moreover, Slovak incomes are catching up with the rest of the region. In 1993, Czech GDP per capita (PPP) was 54 percent higher than that in Slovakia. By the end of 2004, that difference fell to 33 percent.

Yet despite those successes, the member parties of the governing coalition are deeply unpopular, and so is Dzurinda himself. One reason for their unpopularity was the belt-tightening that accompanied economic liberalization. Not surprisingly, welfare dependants, who were used to generous handouts that the current government reduced, are among the most dissatisfied.

More serious are the accusations of corruption among government officials. For example, two government ministers were forced to resign after being accused of misusing public funds for private benefit. Government procurement, despite substantial reforms aimed at greater transparency, continues to be much abused. The airing that government corruption receives in the media is a positive sign, of course. The free media has an important role to play in promoting clean government. Unfortunately, it is sometimes forgotten that the Slovak media was not always free to write about the behavior of public officials. As a result, perceived corruption under the current Prime Minister seems worse than that which preceded him.

Robert Fico, the leader of the left-wing opposition, is to be congratulated for his efforts to keep the current government transparent and accountable. The same cannot be said of his determination to reverse many of Dzurinda’s market-friendly policies. He has bashed pro-market reforms and called for “solidarity” that he hopes to pay for by reinstituting a progressive income tax and different VAT rates on different products, and increasing the corporate tax rate. He also wishes to abolish the compulsory enrollment of new workers in the private pillar of the pension system. The flexibility of the labor market, the most important contributor to the rapidly declining unemployment in Slovakia, will likely be constrained as well. Aside from their negative effect on economic growth, Fico’s policies would significantly compromise the business-friendly image that Slovakia nowadays enjoys.

Fico points to the socialists in the Czech Republic, who managed to combine a relatively high rate of growth with more extensive welfare provisions. He misses one crucial point, however. Historically, the Czech lands have always been richer than Slovakia. Moreover, economic liberalization carried out by Vaclav Klaus in the early 1990s enabled the Czech Republic to grow richer faster than Slovakia, which eschewed substantial economic reform until 2002. Today, the Czech government is reaping the benefits of Klaus’s reforms. The moral of the story is that wealth-creation should be the priority.

Aside from Fico’s populist rhetoric and dubious policy proposals, there are serious questions about the “gravitas” of his economic team. His shadow finance minister, for example, is Igor Sulaj – an amiable accountant with questionable readiness for office. After being repeatedly caught getting his facts wrong, Sulaj now refuses publicly to debate officials from the Finance Ministry for fear of further embarrassment. Another one of Fico’s economic advisors is Professor Peter Stanek, who advised the Meciar government and is, therefore, partly responsible for the economic crisis of the late 1990s.

The current government hopes to counter Fico’s appeal with the voters by adopting, among other things, lower taxes. By 2010, Dzurinda proposes that the personal income and corporate tax should fall from 19 percent to 15 percent. The Christian Democrats, Dzurinda’s erstwhile coalition partners, want the tax rates to fall to 14 percent.

But Dzurinda must do more to tackle the question of corruption. He should commit to supporting new measures aimed at curtailing corruption in Slovakia, including the repeal of parliamentary immunity for lawgivers accused of committing crimes and misdemeanors, and the overhaul of government procurement procedures. Bearing his personal unpopularity in mind, Dzurinda should also announce that he will not seek the premiership again and endorse his very capable and highly regarded Minister of Finance Ivan Miklos instead.

Failing that, the polls show, Fico’s party alone will receive about a third of the vote, which is roughly as much support as all the pro-market parties put together can count on. That means that the unlikely king-maker will be Vladimir Meciar, whose party enjoys support of 12 percent of the public. Ironically, the future prosperity of the Tatra Tiger will thus depend on the inclusion in the government of a man who brought Slovakia to the brink of economic meltdown. But that may be the price to pay for keeping Fico out of power. If so, it may be a price worth paying.