Martin Barto is one of the main proponents of bank restructuring.
photo: Marek Velček
Like Pavol Rusko, the director of the country's popular television station TV Markíza, and Ján Kasper, director of the state gas monopoly SPP, Barto was active during the 1980's in the SZM, a communist youth league. He has been a steady advocate of the need to speed up market reforms since the 1989 revolution, and his forthright criticisms of the economic policies followed by the current and previous governments have been widely reported in the Slovak and international press.
The Slovak Spectator visited Barto in his bank office on August 17 to discuss his economic and political vision.
The Slovak Spectator (TSS): What does a degree in Chemistry have to do with macro-economics? How did you come to hold the post you now have?
Martin Barto (MB): During my university studies, I was involved in mapping out mathematical models of the processes involved in chemical engineering. I focused on the dynamics of non-linear phenomena in this area. It was very interesting - you needed a lot of math, some knowledge of computers and a great imagination.
There are some links between chemical engineering and economics. For example, in each you have balances - what enters each system must equal what comes out of the system and what is consumed within. This is the basis of both fields. So it wasn't so difficult.
I worked at the university until 1993, when I got an offer from the secret service. I worked there for some time as the deputy head of the analytical department, studying foreign and domestic politics, economy, migration of peoples and so on. It was very challenging and interesting, but very soon after Mr. [Ivan] Lexa took over [the intelligence service in 1995], I had an interview with my boss, who told me I had to leave. I didn't protest.
I then joined [Dutch investment bank] ING Barings as an analyst, and from there came here.
TSS: How were you able to do the ING Barings job or the one you have now without formal economic training?
MB: Maybe I was lucky, because I came in at the very beginning when ING started with this [economic analysis department] and it probably wasn't easy to find anybody. After quitting the secret service, I worked on an external basis preparing material for ING's monthly report, and they decided to hire me full time.
TSS: Your SLSP bank lost almost five billion crowns [$120 million] last year. What are the main problems you face, as chief of strategy, in turning things around?
MB: The main problem is our non-performing loan portfolio - over 40% of our loan portfolio [30 of 70 billion crowns] consists of classified loans. There are several reasons behind this. First, this bank wasn't used to giving credits [when it started to do so], so it had no credit or risk policy. Then there were also credits which were given by political order, more or less.
TSS: To whom were these credits given?
MB: You can guess.
TSS: Our readers may not be able to guess.
MB: It's very difficult. I don't want to be more specific.
TSS: Bank privatisation, one of the government's main early goals, seems to have become bogged down. What's going on?
MB: It has not gone as quickly as we expected. I think there was not a clear decision taken, and I think that some members of government needed some time to understand that this process will cost a lot of money, somewhere in the range of 90 billion crowns, which is around 10% of GDP. But it is imperative, because at the moment the biggest three banks in the country are unable to supply credits. We need a banking sector which is able to supply the economy with money.
TSS: How is the sale of a stake in SLSP most likely to proceed?
MB: In the first stage the loan portfolio will be cleaned up enough for the government to be able to sell the bank. A minority stake will then be sold to one strategic investor, and probably there will be some option for purchase of the rest of shares. I hope this process will be finished by the end of next year.
TSS: You supported the Democratic Party (DS) in 1994 elections and the SDK in 1998. How closely did you work with the SDK before last year's elections?
MB: Simple. I participated in the activities of the SDK's Economic Committee. Once a month we discussed problems and came up with ideas for what to do.
TSS: Would you consider yourself a party insider?
TSS: After almost 10 months, how would you assess the work of the current government?
MB: Different people [in the government] deserve different marks. You also have some top politicians at the heads of ministries, as well as people within the ministries, whose thinking it is not possible to change at one blow. So the work of these ministries is more or less dependent on the activities of the entire staff, meaning that the mark which would be given is not that much better than in the Mečiar era.
There are some noticeable improvements in the Ministries of Finance and Economy. I saw some industrial documents from the Economy Ministry, for example, and they contain a new kind of thinking.
TSS: How do you mean?
MB: There has been a strong shift from a paternalism to a market-oriented approach. There is more modern thinking - they advocate foreign investment, they rely more on market forces and they stress the need for competition and a stable environment.
TSS: And the Finance Ministry?
MB: Their documents on the restructuring of the banking sector and the corporate sector are quite good. But these are only intentions; we will see what changes in legislation result.
TSS: Have you been satisfied with the work of Deputy Prime Minister for Economy Ivan Mikloš?
MB: I think he has done the best he could, but he has had some external limits placed on him. He is not the only person in the government, so he has had to negotiate. His position is very difficult, for we must always consider with whom he sits in government.
TSS: When you say "external limits," are you referring here to the leftist parties in government - the former communist SDĽ and the populist SOP?
MB: Mostly the SDĽ.
TSS: Have you been surprised by the refusal of the SDĽ to support the necessary economic reforms?
MB: Yes, because I think they are aware of the situation in the country, but they are not offering any tools or any methods to improve the situation. They are sometimes suggesting things which will worsen the situation.
TSS: Slovakia has not received as much FDI this year as it expected. What are the reasons behind this?
MB: Investors are still hesitating. The Kosovo crisis complicated matters in the first half of the year, and we were simply too close to it. Other investors have decided to wait until after the Helsinki summit [of EU member nations in December, at which Slovakia may become a frontrunner for early EU acceptance].
TSS: Does Slovakia's tax policy have anything to do with this hestitation?
MB: Of course, our taxes are relatively high compared to surrounding countries. In Slovakia we have 40% corporate tax, while in Hungary it is 18%, in the Czech Republic around 30%.
TSS: But corporate tax is 40% in Canada and 38% in the US, so why should anyone feel that Slovakia's tax burden is unbearable?
MB: OK, but these are different economies, and maybe they don't need to attract corporates which are seeking low tax rates. You also have to bear in mind that companies have to pay large amounts [around 12%] into social insurance funds here, as well as a 38% tax on salaries, which makes the cost of labour here higher [compared to neighbouring countries]. Finally, while you pay higher taxes in Canada or the US, you receive better services in return - for example, the legal system is more efficient and more transparent, state offices are more friendly and so on.
TSS: Given this enormous tax burden on corporates and individuals - almost 66% in direct and indirect taxes - how is it that most government ministries have no money?
MB: I don't agree. There is money in the system, but there are no real controls on how it is spent or for what reasons. We still lack transparency here. Furthermore, many expenditures are set by law, so it's not possible to cut costs without changing the laws.
You also have to bear in mind that the health care system in particular is part of the grey economy - it is quite usual that if you are going in for some kind of surgery you pay some money [under the table] to your doctor, and of course this money is real, and has to be added [to what state funds are already in the sector]. In other countries, however, you don't have to pay any extra money.
TSS: So where is all the money going? Where are the main inefficiencies in this state?
MB: A lot of money is distributed in social benefits to unemployed people. A lot of money goes into state administration. A lot of money goes into education and the health care system. There are large subsidies for agriculture. But the main inefficiencies are in state administration, which is too large and too costly - it is overstaffed, for all that civil servants are poorly paid and thus are providing a poor service.
A lot of money also goes into debt servicing, which we can't do anything about. We are paying about 19 billion crowns a year, or 10% of state budget expenditures.
TSS: If you were given the job of fixing Slovakia's economy, where would you start?
MB: I would reduce taxes, introduce a new three-pillar pension system run by strong companies from abroad, because I think we are not able to do this ourselves. I would also introduce a new health care system based on personal participation and optional insurance, and I would privatise everything.
TSS: Reform of the pension system has been a favourite topic of yours in the past. What's wrong with the system we have now?
MB: The main problem is that it doesn't have enough money to finance the demands that will be made of it - the crunch may come this year, but certainly within two years the system will be unable to pay out what it should. This is happening because of demographics in Slovakia, and it means the pension system will not be able to guarantee people a full pension.
There are several things that can be done. The first is to increase the retirement age, which at 60 for men and 55 for women is very low compared to other countries. Then we have to split contributions to the pension system between a pay-as-you-go system and individual accounts that people contribute to. About 70% should go into the classical system we have at present, and 30% into individual accounts.
If reform does not occur, it will become a political risk for future governments, as pensioners begin to vote for non-standard parties that favour radical solutions to the problem. But the current government will be able to fix the system temporarily by pouring money into it and allowing it more or less to function. They can use extra revenues from privatisation, money from the 'sick leave' fund, and I imagine they have a few other tricks for getting money into the system.
TSS: What are the main macroeconomic problems to watch out for in the second half of 1999?
MB: The twin deficits. At the end of the first half, the trade deficit was still around 27 billion crowns [$643 million, or 70% of what it was in the first half of 1998]. It's still around 6 or 7% of GDP, which is too high. We have to bring it down below 5%.
More serious even is the fiscal deficit, which is relatively very high; it was around 12 billion crowns [$286 million] at the end of July. It is questionable whether they will meet their year-end target of 15 billion crowns. The government has simply failed to cut its expenditures, which is its most serious problem.
TSS: Do you see any sense of urgency in the government on this issue?
MB: Among some ministers, like Mikloš and [Finance Minister Brigita] Schmögnerová, yes. But so far they have been unable to convince their colleagues to make significant reductions.
TSS: Do these other ministers simply not understand the country's situation?
MB: I don't know. Maybe this is a question you should address to them. For example, the Education Minister [Milan Ftáčnik] has refused to cut the number of teachers. I understand this would be a very painful step, but he should at least consider it. Or the Education Ministry should abandon the idea of running primary and secondary schools, and these should be put under the jurisdiction of local governments, which would create efficiencies. It's nonsense to try and control the entire school network from Bratislava. It's stupid, and of course very expensive.
TSS: It's often said that Slovak politics is not a contest between ideologies but between competing interest groups.
MB: I agree.
TSS: Do you think this is behind the refusal to reform, that no party will put the greater good above its own interests?
MB: It's the problem of the former government and of the current government, and will definitely be a problem for future governments. It will be very difficult to free ourselves from this in the foreseeable future.
TSS: So what do we do in the meantime? How can we hope to attract investment if our government is a collection of competing lobby groups?
MB: I think there should be more pressure in society for greater transparency and openness. There are some good things going on - [international corruption watchdog] Transparency International is active here now, which is very positive, and there is also a law on Access to Information being prepared, which should help.
But just because we have a new government, old ways of behaving do not simply evaporate. It is a long and painful fight and progress is very slow.