OECD praises Slovak economy

THE ORGANISATION for Economic Co-operation and Development (OECD) praised Slovakia for its "stellar" economic performance and confirmed the country is on track to adopt the euro on schedule in 2009. But the economic group has also warned that changes are needed to keep the economy strong after the country enters the eurozone.

THE ORGANISATION for Economic Co-operation and Development (OECD) praised Slovakia for its "stellar" economic performance and confirmed the country is on track to adopt the euro on schedule in 2009. But the economic group has also warned that changes are needed to keep the economy strong after the country enters the eurozone.

The Economic Survey of the Slovak Republic for 2007, released on April 5, noted Slovakia's strong growth, decreased inflation and falling unemployment figures as positive developments.

"The Slovak Republic can be proud of its achievements," said OECD secretary-general Angel Gurría at a presentation in Bratislava held to release the survey on April 5. "They have put you on the path of progress, growth, and also towards the euro."

Slovakia has made several advances since the group last reported on the country in 2005, said Andreas Wörgötter of the OECD's economics department, who supervised the report.

"One of the things the country has most done is making use of the growth opportunities it has as a member of the European Union," he said. "The country is presenting itself very successfully as an investment location, also for global companies that want to have a foot in the EU."

Economic growth was projected to be eight percent in 2007, partially due to new car factories setting up shop in Slovakia.

But Gurría warned that the growth will inevitably slow down from its current sky-high level.

"When you're growing at six percent, please don't feel disappointed," he said. "The fact that you're growing fast ... is a necessary condition for you to catch up. And you have a lot of catching up to do."

Slovakia will also need to look for other ways to keep moving the economy forward, he said.

"We can't live on the next car factory and think that we're going to have a new car factory every year," Gurría said.

Slovakia needs to act now to make sure the economy doesn't over-heat as a result of the lower interest rates that come with switching to the euro, according to the report. That has led to unsustainable booms, followed by crushing busts, in other countries that have joined the eurozone, Gurría said.

And with the euro, Slovakia won't be able to adjust the value of its currency to compensate for market fluctuations, as it has so far. Instead, the report calls for Slovakia to introduce economic policies that will counter the post-euro boom. It also recommends more flexibility in the labour and product markets - for example, low unemployment benefits and low minimum wage.

The call for labour flexibility is a sound recommendation, said economist Juraj Kotian of the SLSP bank.

"A flexible labour market is the only tool to avoid any sharp economic downturns," he said. "Having less constraints on the labour market should be beneficial."

The OECD report said Slovakia's short-term unemployment rate has been consistently shrinking over the last several years, but long-term unemployment has remained steady at about 10 percent.

Of growing concern is the number of older people and young women who are unemployed. The OECD suggested raising the mandatory retirement age to reflect longer life expectancies, and reducing the maternity leave from three years to one, with additional child care benefits.

"The overly generous maternity leave of three years is harming women's employment prospects," Gurría said.

The report also urged a low minimum wage, because it becomes more difficult to fire employees that earn more, which means fewer job openings for people searching for low-skilled positions.

But Miloslav Hetteš, head of the Labour, Social Affairs and Family Ministry's international relations section, said the government disagreed with those suggestions.

"We consider this an open document which is the basis for further discussions," he said.

Wörgötter welcomed the proposal to discuss the report, and said the OECD and the government are already planning to hold future meetings.

He added that the government has already been receptive to the OECD's suggestions for improving education across the country. This was identified as a key way to support the country's economy.

Slovak students are performing below the EU average in areas such as reading, maths and problem solving. The main problem is that children from low-income backgrounds, particularly Roma children, do worse in school and drop out more than their better-off peers.

The education ministry has already announced plans to introduce free kindergarten by 2008. But they must also make sure that all municipalities, particularly the ones in poorer economic areas, have the financial means to open kindergartens, the report said.

Gurría met with a list of key government figures, including Prime Minister Robert Fico and President Ivan Gašparovič, over a two-day visit to Bratislava.

Gurría also met with top managers from Slovnaft and toured the refinery to see the multi-million crown improvements the oil giant has made to improve its productivity, and discuss the company's recent move to start producing and selling biofuels. He commented after the tour that refineries play an important role in a country's economy and environment.

Key recommendations from the OECD report:

* If the economy overheats following euro entry, introduce stronger fiscal policies to counter the boom
* Avoid strong employment protection measures and further increases to the minimum wage
* Lift the requirement for 30 percent of financial investments in the second-pillar pension scheme to be directed to domestic assets
* To make it easier for people to move from one region to another in order to find employment, remove hurdles to developing the private rental market and target public housing to regions where housing demand is strongest
* Index the mandatory retirement age to gains in life expectancy
* Shorten maternity leave to one year, paying the balance in the form of childcare subsidies
* Start educating children from lower socio-economic backgrounds at age four
* Use higher salary increases to attract good teachers to schools in areas with poor socio-economic backgrounds
* Consider introducing tuition fees for full-time students in tertiary education
* Improve independence of the telecommunications operator and regulator

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