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INVESTMENT LEADERS

Interview with Vladimír Masár chairman of Deloitte

The Slovak Spectator (TSS): Deloitte did a survey last year that found that 81% of the top companies surveyed in Western and Eastern Europe predicted that the new member states of the EU would become more attractive for investors following enlargement. Has this prediction come true?

He worked in external economic relations with the Czechoslovak state bank from 1981 to 1990 after graduating from the Economic University in Bratislava. He served as deputy director of the VÚB bank and assets operations manager at Tatra Banka before becoming deputy finance minister of the fledgling Slovak Republic. He was chairman of the preparatory commission for the establishment of the National Bank of Slovakia and served as the central bank's first governor from 1993 to 1999. He is now chairman of the Deloitte practice in Slovakia, in charge of developing businesrelations with decision-makers. Vladimír Masár.
photo: Tom Nicholson

The Slovak Spectator (TSS): Deloitte did a survey last year that found that 81% of the top companies surveyed in Western and Eastern Europe predicted that the new member states of the EU would become more attractive for investors following enlargement. Has this prediction come true?

Vladimír Masár (VM): I think in Slovakia's case it has unequivocally been the case, because the investment boom we are witnessing at the moment has become one of Slovakia's defining characteristics. Foreign investment is no longer merely flowing into existing companies or privatization, as was the case until recently, but we are now getting new greenfield investments. We are also seeing some very large investments that represent a significant share of our GDP. What is more, over the past several years we have been catching up, in terms of the ratio of foreign investment to GDP, to those countries that had earlier outpaced us, particularly in the Visegrád regional grouping [containing Slovakia, Hungary, Poland and the Czech Republic - ed. note].

From this perspective, Slovakia's entry to the European Union had a number of effects, as did its joining NATO. It raised the overall credibility of the country, as well as the country's ratings from ratings agencies and investors themselves. This increased credibility was then reflected in new perceptions of Slovakia's political stability and its economic attractiveness.


TSS: Is there also room for improvement in connection with reforms? How have reforms influenced investors?

VM: There always is room for improvement. Every economic system can be bettered, including ours. Problems remain in Slovakia in areas like the enforceability of the law, corruption, and other chronic problems. The investment boom wasn't brought about by the reforms that are now being carried out, and it will take some time before the impact of the reforms will be seen in the behaviour of new investors. We can expect that they will gradually analyze the positives and negatives of the current reforms. One exception may be tax reform, which due to its simplicity and the lower income tax rate may even now make Slovakia attractive for investors.


TSS: There are apparently two views of what the Slovak economy needs right now. One, pursued by the ruling coalition Christian Democrats (KDH), calls for the thorough investigation of past economic crimes, particularly those connected with privatization in the 1990s, while the other line, perhaps best represented by Finance Minister Ivan Mikloš, calls for consolidation and the development of what has been achieved so far, and less emphasis on economic "housecleaning". Which view do you subscribe to?

VM: I don't think you can draw it in such black and white terms. No one says we should just investigate crimes and neglect economic development, just as no one is calling for economic development by any means possible, even illegal acts. I think investigations should be governed by the law - if something is illegal, it's not a matter for debate but for investigation in accordance with the law. Conversely, if something was legal, we shouldn't create a scandal on the grounds of a political decision or other elements that often have no economic foundation.

The Eastern Bloc as a whole underwent a huge social, political, economic and legislative transformation, which gave rise to different views among people as to what was moral or immoral, ethical or unethical. The change from public to private ownership of property, however, had to take place, as it was necessary for the transformation of the political system.

It's completely natural that a large part of our population still thinks along the lines that "if something is not in my interest, it is to my disadvantage." But the important thing is that after all the steps that were taken along the path of turning a socialist economy into a market economy, today we can say we have a developing market economy that matches the parameters of other developing economies, and that we have overcome the handicap of having been a new country that had to develop all of the systems, state institutions and other elements of being independent. We have shown that we have a viable economy.


TSS: Slovakia has not managed to successfully prosecute a single major player in a suspect privatization despite general agreement that privatization was significantly corrupt. Doesn't that represent a barrier for foreign investors, a kind of moral risk in the economy?

VM: Legislation on all significant forms of privatization, whether coupon privatization, small-scale privatization, privatization by the managements and employees of companies, or other forms, was prepared under considerable time pressure and often included many unclear, even contradictory provisions. Therefore, I believe that investigating and securing evidence of infractions of laws is very difficult.

I think that foreign investors also understand the complexity of this time period and see it to a certain extent as a necessary evil related to the transformation of the economy. What's now important for them and their potential investments is a transparent and stable environment.


TSS: Another survey that Deloitte published this year showed that Slovakia had the cheapest labour force in the EU 25, when wage, insurance and funds costs were factored in, or about 250,000 Sk per year. Is this healthy for Slovakia?

VM: Having a low-cost workforce has its advantages and many disadvantages. The advantage is that under certain parameters and for a certain kind of investor, Slovakia appears to be an attractive destination with low wage costs.

On the other hand, these low wages to a great extent are related to the high unemployment rate in this country, which no one can take any pleasure in. Slovakia and Poland today have among the highest unemployment rates in Europe. Our main economic goal should be an increase in the living standard of our population, and that can't happen if wages stay the same and prices rise. So our goal should not be to keep wages permanently low or pat ourselves on the back because we have low wages, but to increase labour productivity and thereby ensure a high level of employment at high wages. This would prove that our economy is able to compete.


TSS: But if that happens, doesn't Slovakia, having attracted many investors for its low wage costs, run the risk of seeing these investors move further east in search of ever cheaper wages?

VM: Not if we increase labour productivity. If investors are able to make similar profit margins at high wages as they do now at low wages, by which I mean that these higher wages would correspond with increased labour productivity, investors will have no reason to leave the country. Of course, if higher wages do not lead to increased productivity, profit margins will fall and investors will start looking for other countries where they can achieve better margins.

On the other hand, one must realize that both the mentioned reforms and the ongoing investment boom are important only if they result in a better standard of living for our people. If they don't improve the standard of living in Slovakia, then, in economic terms, they are a waste of time for us.


TSS: Some investors have reported that Slovak labour productivity is higher than they originally expected. How do you explain this?

VM: Slovakia used to have a significant defence industry within the former Eastern Bloc, and the defence industry tends to have the most modern technology and workers of above-average skills and experience. Given the structure of the industry that existed here before the 1989 revolution, Slovak labour was already relatively highly qualified. Given the unemployment rate, moreover, I think many of our qualified workers are prepared to work under conditions that would be unacceptable to their Western European counterparts. We see this in the various cross-border activities of our people, where even highly qualified people do jobs [in foreign countries] for less pay than they might otherwise earn [if they were citizens of the host country], merely because the wage they get is still higher than what they could earn in Slovakia.


TSS: The rise of financial groups and private equity funds in Western Europe, where huge assets may wind up in the hands of a few people, is a hot and sensitive topic of debate in the West. Slovakia, too, has seen the startling growth of corporate raiders. Are people right to regard these firms with suspicion?

VM: I think it's natural that just as wealthy economic groups arose in Western Europe or the US and Canada, the same thing is happening here. On the other hand, regarding the speed with which these groups have arisen, the transparency with which they accumulated their wealth, and related issues of legality and morality, or their stability in cases where they are based on one person or a small group of people - and I'm not singling any company out here - I think it's completely natural that questions should arise. It's one thing when the wealth is accumulated within a certain group over decades or even centuries, and it's another thing altogether when the accumulation takes place in the course of such a short period as we witnessed in Eastern Europe. People are naturally more cautious in such cases. On the other hand, I still feel that Slovaks have greater tolerance for rich foreigners than for rich Slovaks.


TSS: You served as the governor of Slovakia's central bank from 1993 to 1999. With the deadline for Slovakia's transition to the euro steadily approaching, what are the most important tasks the central bank faces?

VM: The most important thing will be how well prepared the Slovak economy is for the Slovak currency to be fixed in the European currency system, because anchoring it requires a certain stability in the budget and currency and the meeting of certain macroeconomic goals such as inflation, interest rates and the state of public finances. Meeting these criteria is the important thing. Political decisions regarding entry into the common currency system should be fully supported by a stable economy prepared for such a step.

I often get asked if it is to our advantage to adopt the euro, and I say that having your own monetary policy confers both advantages and disadvantages, depending on the situation in which you operate. Today we're in the position that we should try to adopt the euro as quickly as possible.


TSS: In a sense, the central bank is now finishing the job you started. Do you envy them?

VM: Not really, because creating the national bank and creating all the related systems was very interesting and exciting. I think it was actually a more beautiful period than the current one, because it's nicer to start something than finish something. I think that in the short existence of the Slovak currency, despite the enormous pessimism that accompanied its birth, it acquired a certain stability and credibility on the domestic market and in terms of international convertibility, and that the central bank was a stabilizing force in the development of the economy. That pleases me, and I regard it as natural that just as Slovakia has become a part of the European Union politically, we should become a part of the European Monetary Union.


TSS: In 2002, before Slovakia joined the NATO alliance, a Western journalist asked a group of young Slovaks why their country needed to join a military alliance, and received the answer that Slovaks would benefit not so much from NATO itself, but from the better laws and more transparent processes the country was being forced to adopt to gain entry. Do you agree with this view of the integration groups Slovakia joined last year?

VM: I had a very similar experience at a conference where I was asked about the Maastricht criteria [that countries' economies must satisfy before they can adopt the euro - ed. note]. I was asked whether I supported the process merely because the criteria had been laid out by Maastricht. I answered that it was far more important that our economy met these criteria, regardless of whether we joined the European Union, than for us to join the EU as the result of some integration process. I believe these criteria, and those laid down by NATO during Slovakia's accession, are very healthy for our society, and that it is very important to implement them because to a certain extent they guarantee efficiency in the improvement of our democracy.

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