OECD: Slovakia will be judged by its actions

MEXICAN-born Angel Gurría, the secretary-general of the OECD, visited Slovakia from April 4 to 5 to present the group's economic overview of Slovakia. His message to the Fico government regarding economic reforms was clear: Change reforms if you like, it's the prerogative of every democratically elected government. But be warned that if you change them for the worse, the markets will punish you quickly and harshly.

Angel Gurría, secretary-general of the OECD, announced the publication of the OECD's report on Slovakia during his visit.
photo: SITA

MEXICAN-born Angel Gurría, the secretary-general of the OECD, visited Slovakia from April 4 to 5 to present the group's economic overview of Slovakia. His message to the Fico government regarding economic reforms was clear: Change reforms if you like, it's the prerogative of every democratically elected government. But be warned that if you change them for the worse, the markets will punish you quickly and harshly.

At the same time, Gurría cautioned against reading too much into government rhetoric on halting or changing reforms. In his books, it's the deed that counts, and politicians often just need to sound consistent to their voters.

Gurría spoke to The Slovak Spectator on April 4 at the Bôrik Hotel in Bratislava.

The Slovak Spectator (TSS): The OECD's 'Going for Growth 2007' report on Slovakia recommended that the government cut industrial and agricultural subsidies and keep the minimum wage relatively low. The Fico government has raised agricultural subsidies and the minimum wage, while also threatening to change some of the reforms that led to 8.3 percent GDP growth last year. Are you confident that this government can ensure growth in the long-term?

Angel Gurría (AG):The problem is not that the economy will not grow. The problem is above all at what rate it will grow, and then how you will allocate the resources. We are recommending that agricultural subsidies be reduced in all European Union member countries. It's not just Slovakia's problem. We believe that these subsidies are not doing what they were intended to do, and that they are not flexible. There are many other needs.

Angel Gurría met with Slovak Prime Minister Robert Fico during his two-day visit to Bratislava.
photo: SITA

It's also a question of signals. Normally the state budget serves to do things that the market cannot do, things that governments feel they have to do. But the resources really start to flow in the private sector - credit, investment, etc. - when there is confidence in the economy, in the authorities and in their good judgment. When investors see that the decisions that are taken are consistent.

TSS: Do you think that the Fico government is sending the signals that the market wants to hear?

AG: I think it's early. We have a number of issues that are now being discussed, and probably the single most important one on the fiscal side is the pension system, because it has an impact today as well as on future generations. This is going to be looked at very carefully. It's an inter-generational problem, and you can end up creating some liabilities in the medium term that are quite onerous. It's a difficult choice.

[The Fico government's] discussion on the pension plan is still in its early stages among the various ministries, but it's going to be quite important. The first [Dzurinda government's] pension reform was quite well received. What they decide to do under this government will be quite interesting, because they have a chance either to improve it or to dilute it. Hopefully in the end they will choose the former.

TSS: Most proposals so far from the current government have been to dilute the pension reform, such as by reducing contributions to the second pillar, making the second pillar optional, and requiring certain people to remain in the first pillar. The government has also adjusted the tax reform and the health care reform, and is preparing radical changes to the Labour Code reform. Given how well the international community received Slovakia's reforms from 2002-2005, how are the Fico government's plans to change these reforms being received?

AG:We have to wait and see what actually happens, not what people say is going to happen, because the markets give you much less room to manoeuvre than you think. They give you a lot of room for discourse, but in practice markets are very tough judges of actions. They are also very immediate judges. If the markets perceive that there is some kind of drift, some relaxation in policy, this is immediately reflected in access to credit, or in the ratings or the spreads.

Slovakia is a country that needs foreign investment to complement its own capacity to save and to grow. It has been receiving good amounts of foreign investment, and it has been growing, because there was a perception of good macroeconomic policies. The framework is still OK, but micro policy also has to be good, because we are talking about investors who are really doing business, making cars or running a refinery, not discussing economic policy in a seminar.

TSS: The current prime minister has made a point of demonstrating his independence from Washington and Brussels saying things like 'the world has four directions', and 'I won't be anyone's lapdog'. Do you have the feeling this government is listening to what the OECD and the markets have to say?

AG: We have only been here for a few hours, and the people I have talked to have not only listened, but they know what to do, and that is even better. I'm talking about the governor of the central bank, the finance minister, even the speaker of parliament - these are people who understand very well how the market works, how reality works, how opinions spread, and I think they all understand the importance of keeping up with [market] expectations. We are going to talk to the prime minister and the president tomorrow.

Having social concerns is not a problem, and we could say it is even indispensable. Slovakia is still at around 50 percent of the EU 15 [in terms of GDP per capita], which means it has a lot of work to do to achieve convergence. So people are quite aware that Slovakia will continue to need the outside world for some time, just as they are aware that the outside world needs reassurance.

The government of democratic institutions is difficult. If you have coalitions that are formed of several parties with different ideologies, sometimes you have to give some space to the members of the coalition to have their say. Some parties in some countries in Europe decided several years ago that there would be no nuclear energy. Now, whenever such parties enter a coalition with other parties, obviously they are not going to change their mind, but their partners have to take that into consideration.

I see more pragmatism [in the Fico government] than you would appear to suggest, but I also see a need by some of the politicians to make some statements and take some positions which may be consistent with their own party's platform. Their deeds will be what counts, rather than the speeches they make.

TSS: In a recent poll published in the Sme newspaper, when people were asked which government was responsible for Slovakia's current economic growth, more respondents believed it was the Fico administration, which had been in power for six months and had started dismantling reforms, than the previous government, whose reforms have won Slovakia international credit.

AG: If that [the poll results] encourages the present government to persevere with reforms, so much the better.

TSS: But the results suggested that ordinary people may not understand the need for reforms or their impact, or even how long they take to have effect. As a result, they may see no need to defend them if they come under attack.

AG: That is precisely the greatest problem of reforming the political economy. That people don't understand how difficult it is, how long it takes to implement, and how long it takes to bear fruit. Therefore, governments have to start with the process of translation, of education, of communication, and the media have to help, in order to sell or to plant the idea that reform pays, even if it has short-term costs, because the medium and long-term results of reform are many times the costs.

TSS: Doesn't that contradict what you said earlier about giving politicians the leeway to make speeches consistent with their party platforms? When these speeches attack economic reforms as insensitive and badly designed, they end up frustrating the process of education and communication.

AG: Well, you do have a problem there. One of the greatest challenges we have is that in situations where the citizens doubt the government, it makes it very difficult to believe in someone who is selling the reform process. That's where institutions like the OECD can come in. We can go in and put these issues on the table, and then have everyone say, 'Well, it's the OECD that said it'. We're willing to play that role, to promote reform. And it's not just Slovakia's problem - every government is finding it increasingly difficult to pass reforms. Or rather, to pass reforms and then win the next elections.

TSS: Slovakia is regularly criticized by international institutions like the OECD, IMF and World Bank on corruption. Economy Minister Ľubomír Jahnátek said in a recent magazine interview that in order for state arms trading firms to compete with private firms for weapons contracts in the third world, they had to learn how to record bribes, or 'provisions', in their official accounting. Do such statements concern you?

AG: All 30 members of the OECD, along with another six countries, are members of our Convention on the Bribery of Foreign Officials. One of the things this convention was able to do was to change bribes from being tax-deductible to being a crime. Not all countries pursue such criminals actively, but many do, and more and more we are seeing cases [of corruption] being widely reported and becoming common knowledge, which is helping us to establish the fact that this is a crime that should not be allowed.

Corruption really causes damage that is many times more costly than the amounts that are transferred from one party to another, because it affects the quality of decisions, and the choices of technology and equipment [selected in crooked public procurement]. It's a very corrosive element among business practices. It affects democracy and public faith in governments.

Slovakia has signed on [to the anti-bribery convention], which means it has to observe the behaviour that is expected from any member. This means the country has to make the convention part of its own code of conduct at the national level.

TSS: Since the minister made his statement, the prime minister has publicly backed him up, saying Jahnátek was only describing the way things really worked in the arms trade, while the cabinet even officially recognized his "personal courage" in speaking the truth. You said that politicians should be allowed to make speeches, and that judgment should be reserved for their actions. Does this also apply to speech that is tolerant of corruption?

AG: First of all, people sometimes say unfortunate things. Second, we have a problem with the convention, and that is that many of the countries that signed it are not actively implementing it, which means it is not as live a force as it should be. The problem is also that things do not get picked up by each country's peers.

But one day, Slovakia will be asked to account for itself, and its peers will ask: 'How good have you been? What have you done?' It happens with all [OECD member] countries, it was just done with the UK, Ireland and Spain. It's a jury of your peers. It's not the OECD bureaucracy, it's the other 29 countries. And the diagnosis will not be good for those countries that have not actively been pursuing this agenda.

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