Freedom and the EU in Slovakia

A YEAR after entering the EU, it is clear that Slovakia has become more economically successful because of it, and possibly even gained some cultural benefits. There has been wide international acceptance of Slovakia as a small but equal country in the EU, which has allowed investors to evaluate Slovakia with respect to economic considerations.

A YEAR after entering the EU, it is clear that Slovakia has become more economically successful because of it, and possibly even gained some cultural benefits. There has been wide international acceptance of Slovakia as a small but equal country in the EU, which has allowed investors to evaluate Slovakia with respect to economic considerations.

The internationally trumpeted flat tax rate (of 19 percent) has been a significant factor in increasing investor interest in Slovakia, as well as making all the Slovak reforms more noticed.

The high value of Slovak workers, both knowledge workers and manufacturing workers, has been increasingly recognized. This value is based on good to very good quality of work, fairly easy training, and low wages. Good quality work for a lower wage is what employers look for to increase their own return on capital (ROC).

A good measure of ROC would likely be in the automotive sector. Comparisons across Europe with Germany, France, Spain, the UK (Rover ending?), Sweden and the Czech Republic puts Slovakia in a good position.

In comparing productivity as cars per worker per year, Slovakia seems to perform quite well; in calculating productivity as labour cost per car, Slovakia is one of the best. Labour cost per unit is the important productivity measure for manufacturing, even as the world shifts to custom-made mass manufacturing.

Unfortunately, Slovakia has not been as successful at either investment or export promotion as it could be, or as the Czech Republic has been.

This was due to many issues , though it seems that Slovakia is now moving forward with almost as much speed as the Czechs, although we will have to move faster to catch up. Thanks to the reforms of the government like the flat tax, Slovakia's gross domestic product (GDP) is growing well. GDP growth is the key variable to watch - and Slovakia IS catching up.

The Wall Street Journal and Heritage Foundation put out a large Index of Economic Freedom for all the countries of the world. In 2004, Slovakia ranked 36, "mostly free", with a score of 2.43 (1 best, 5 worst) based on 10 items.

Each of these shows an EU influence (and the Slovak score for that item will be noted in parentheses; sometimes my comments are not in sync with the scores):

Trade policy (3.0) - the EU has made it easier to buy and sell inside the market, but this ease has often been compromised by new and onerous regulations controlling products and labeling, and requiring expensive tracking capabilities.

Fiscal burden of government (1.8) - with support of the EU Maastricht Treaty as a guide and goal, the centre-right politicians have greatly reduced the tax burden; the 19 percent flat tax is good here. Relative to a populist desire for government programmes to solve every problem, this is excellent.

Government intervention in the economy (2.0) - has been modified in the EU to be more efficient in many areas, rather than going down. Grain subsidies, like the Common Agriculture Policy, are a drain on the treasury and disrupt the trade policy.

The availability of "free money" from various EU programmes has made grant writing almost an occupation by itself, and has certainly diverted a lot of brain power away from other productive uses.

Monetary policy (3.0) - joining the euro zone is the most important and advantageous step for Slovakia's monetary policy, though over the prior ten years inflation has only been fair.

A stable and predictable monetary value is a huge long-term benefit to the economy, despite the loss of potential advantage in retaining such control domestically. Accepting multiple currencies as legal tender also seems unrealistic, although many stores already accept euros as well as crowns.

Capital flows and foreign investment (2.0) - have certainly increased with EU membership, although the huge US Steel investment was done long ago. The reforms have made such inflows easier, and more mutually beneficial. Of course there's no way of knowing for sure how much investment there would have been without the "EU seal of approval", but there certainly would have been less.

Banking and finance (1.0) - the EU, and the whole financial industry, is struggling with Basel II and new International Financial Reporting Standards (IFRS) . While the new Slovak regulations are not so far from IFR Standards, there are important detail differences, which must be incorporated in the accounting practices. On the more macro-economic issues of providing loans, the practice continues of giving a loan officer a kickback after receiving a loan. Not always, and even perhaps not usually, but still far too frequently. Mortgages are big and getting bigger - big consumer loans with fine collateral in a Slovak real estate market that is taking off.

Wages and prices (2.0) - remain mixed, with big ticket import items usually costing world market price, and local, poor distribution areas sometimes costing more, but more often costing less. Wages are way below world wages, implicitly subsidized by the prior Communist housing. With a still high 17 percent unemployment rate, the wages are not going up as fast in Slovakia as in surrounding countries.

Property rights (3.0) - are strong and the EU hasn't seemed to make much impact, except the push to allow EU citizens to buy land. The Land Registries are computerizing and the ability of banks to use houses and flats as collateral has hugely increased. Intellectual Property is copied at rates similar to other EU countries.

Regulation (3.0) - more regulation and bureaucracy is almost certainly negative due to too many EU attempts at controlling, monitoring, and requiring permits for everything. On the other hand, relative to only a few years ago, the efficiency of the Slovak bureaucrats has hugely increased, most likely because of better access to information technology.

Informal market activity (3.5) - there continues to be fairly high demand for a cash economy with no paper trail. The small increase in transparency from joining the EU has almost certainly been overshadowed by the increase in paper requirements, and therefore the increase in convenience of some by not tracking the paper. While the lower tax rates should reduce tax avoidance desires, it seems the loyalty and friendship with business partners is continuing to provide reasons to pay cash.

Slovakia has been constantly improving its Freedom score since 2001: 2.85, 2.76, 2.71, 2.44, 2.43. A much bigger jump than joining the EU in 2004 actually came the year before, in 2003, as the reforms were pushed "in order to join" the EU.

Tom Grey has been a senior fellow/advisor to the Hayek Foundation and the Slovak free market movement since he came to Slovakia in 1991 as a government advisor.

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