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disposes of

Economy of Slovakia

Slovakia is rapidly becoming a developed country, with the highest sustained GDP growth in the European Union, reporting 10.4% in 2007. Slovakia has been a EU member state since 2004 and is set to adopt the euro currency by the beginning of 2009. Its capital, Bratislava, is the largest financial centre in Slovakia. Unemployment has fallen considerably, although long-term unemployment remains stubbornly high. In the long term, improving education outcomes, including by reducing the impact of socioeconomic background on outcomes, will be central to sustaining high economic growth and social cohesion.

History

Since the establishment of the Slovak Republic in January 1993, Slovakia continues the difficult transition from a centrally planned economy to a modern market economy (a reform slowed in the 1994-98 period due to the crony capitalism and other fiscal policies of Prime Minister Vladimír Mečiar's government). While economic growth and other fundamentals improved steadily during Mečiar's term, public and private debt and trade deficits soared, and privatization, often tarnished by corrupt insider deals, progressed only in fits and starts. Real annual GDP growth peaked at 6.5% in 1995 but declined to 1.3% in 1999. Much of the growth in the Mečiar era, however, was attributable to high government spending and over-borrowing rather than productive economic activity.

Two governments of the Prime Minister Mikuláš Dzurinda (centrist-right) made progress in 1998-2006 in macroeconomic stabilization and main structural reforms. Major privatizations are nearly complete, the banking sector is almost completely in private sector hands, and foreign investment has picked up. The economic growth, the strongest in Central Europe, has been more balanced since then and Slovakia's economy exceeded expectations in the early 2000s, despite recession in key export markets. The Slovak government made progress in 2001 in macroeconomic stabilization and structural reform, but this came at a cost of spiraling unemployment. Unemployment peaked at 19.2% (Eurostat regional indicators) in 2001 and though it has fallen to (depending on the methodology) 9.8%((cn)) or 13.5% as of September 2006, it remains a problem. Solid domestic demand boosted economic growth to 4.1% in 2002. Strong export growth, in turn, pushed economic growth to a still-strong 4.2% in 2003 and 5.4% in 2004, despite a downturn in household consumption. Multiple reasons entailed a GDP growth of 6% in 2005. Headline consumer price inflation dropped from 26% in 1993 to an average rate of 7.5% in 2004, though this was boosted by hikes in subsidized utilities prices ahead of Slovakia’s accession to the European Union. In July 2005, the inflation rate dropped to 2.0% and is projected at less than 3% in 2005 and 2.5% in 2006. In 2006, Slovakia reached the highest economic growth (8.9%) among the members of OECD and the third highest in the EU (just behind Estonia and Latvia). The country has had difficulties addressing regional imbalances in wealth and employment. GDP per capita ranges from 180% of EU average in Bratislava to only 60% in Eastern Slovakia(forecast for 2008).

Economic growth

In 2007, Slovakia reached the highest economic growth among the members of OECD and the EU. The annual GDP growth was 10.4% at constant prices, with the record level of 14.3% reached in the fourth quarter.

Fiscal policy

The current account deficit from its recent peak at $1.9 billion (8.8%) of GDP in 2001 shrank to $1.4 billion (3.4%) of GDP in 2004. A drop in the trade deficit accounted for most of the improvement. The foreign trade balance is now largely influenced by strong growth in capital good imports related to foreign investments in the country. Slovakia’s total foreign debt was $23.7 billion at the end of 2004, up $5.4 billion from the 2003. The increase in the level of debt was caused largely by exchange rate losses of the dollar. Budget performance in 2005 was strong, as the government aimed to implement fiscally responsible policies to drive the budget deficit below the Maastricht-defined ceiling of 3% of GDP by 2007 in order to qualify for euro adoption. The government's budget for 2006 targets a general government deficit of 2.9% of GDP.

Foreign investments

Foreign direct investment (FDI) in Slovakia have increased dramatically. Cheap and skilled labor, low taxes, a 19% flat tax rate for both businesses and individuals, no dividend taxes, liberal labor code and a good geographical location are Slovakia’s main advantages for foreign investors. FDI inflow grew more than 600% from 2000 and cumulatively reached an all-time high of,$17.3 billion USD in 2006., or around $18,000 per capita by the end of 2006. The total inflow of FDI in 2006 was $2.54 billion. In October 2005 new investment stimuli introduced – more favorable conditions to IT and research centers, especially to be located in the east part of the country (where is more unemployment), to bring more added value and not to be logistically demanding. Origin of foreign investment 1996-2005 – the Netherlands 24.3%; Germany 19.4%, Austria 14.1%; Italy 7.5%, United States (8th largest investor) 4.0%. Top investors by companies: Deutsche Telekom (Germany), Neusiedler (Austria), Gaz de France (France), Gazprom (Russia), U.S.Steel (U.S.), MOL (Hungary), ENEL (Italy), E.ON (Germany)...

Foreign investment sectors - industry 38.4%; banking and insurance 22.2%; wholesale and retail trade 13.1%; production of electricity, gas and water 10.5%; transport and telecommunications 9.2%.

Foreign direct investment " on green field"

  • inflows -2003 year: 756 millions USD,2004 year: 1261 millions USD,2005 year: 1908 millions USD
  • outflows-2003 year: 22 millions USD,2004 year: -144 millions USD,2005 year: 146 millions USD

Services

Slovak service sector grew rapidly during the last 10 years and now employs about 44% of the population and contributes with over 66% to GDP. Slovakia's tourism has been rising in recent years, incomes has doubled up from 640 millions USD in 2001 to 1.2 billions USD in 2005. However, this sector still remains underdeveloped in comparison with neighbour countries.

Industry

Slovakia became industrialized mostly in the 20th century. Heavy industry {including coal mining and the production of machinery and steel) was built for strategic reasons because Slovakia was less exposed to the military threat than the western parts of Czechoslovakia. after the end of the Cold War, importance of industry, and especially of heavy industry, declined. In 2005, industry (including construction) accounted for 28.7% of GDP, compared with 49% in 1990. Nowadays, building on a long-standing tradition and a highly skilled labor force, main industries with potential of growth are following sectors: Automotive, Electronics, Mechanical engineering, Chemical engineering, Information technology. The automotive sector is among the fastest growing sectors in Slovakia due to the recent large investments of Volkswagen (Bratislava), Peugeot (Trnava), and Kia Motors (Žilina). Passenger car production was 295,000 units in 2006, a figure which will double when Kia's factory reaches full capacity. By 2009 therefore Slovakia will have the highest per capita car production in the world. Other big industrial companies include US Steel (metallurgy), Slovnaft (oil industry), Samsung Electronics (electronics), Sony (electronics), Mondi Business Paper (paper), Hydro Aluminium (aluminum production), and Whirlpool. In 2006, machinery accounted for more than a half of Slovakia's export.

Agriculture

In 2005, agriculture accounted for 3.4% of GDP (compared to 6.9% in 1993) and occupied about 4.7% of the labor force (down from 10.2% in 1994). Over 40% of the land in Slovakia is cultivated. The southern part of Slovakia (bordering with Hungary) is known for its rich farmland. Growing wheat, rye, corn, potatoes, sugar beets, grains, fruits and sunflowers. Vineyards are concentrated in Little Carpathians, Tokaj, and other southern regions. The breeding of livestock, including pigs, cattle, sheep, and poultry is also important.

R&D

According to a recent report by the European Commission, Slovakia (along with some other Central and Eastern European economies) is low down on the list of EU states in the area of innovation (Slovakia ranks 22nd). Within the EU, it ranks next to last on knowledge creation and last for innovation and entrepreneurship. In the process of transition to a knowledge economy, it particularly lacks investment into education and a broader application of IT. World Bank urges Slovakia to upgrade information infrastructure and reform education system, OECD states that a stronger product market competition would help.

In March 2006, the Slovak government introduced new measures to implement the Action Plan for R&D and Innovation. The program covers the period from 2006 to 2010. The RDA is expected to launch at least one call for the expression of interests related to this program each year. The annual budgets for the program will be set by the RDA. The overall amount available for the program depends on the annual national budget resources and is likely to vary from year to year. Following an increase of around 50% in budget resources, the RDA disposes of a total budget of €19.31 million in 2006.

Labor

The authorities now need to prepare the economy for life in the Euro area. In the short term, this entails heading off a potential post-entry boom. In the longer term, it entails maintaining flexible labour- and product markets so as to facilitate adjustment to idiosyncratic shocks. Slovakia has made solid progress in the past decade in catching up to living standards in the EU15 countries, but still has far to go. This progress has been achieved through high productivity growth. Labour utilisation, however, has detracted from progress. There is still considerable scope to support catch up and reduce relative poverty through increasing employment rates. Similarly, regulatory reform that supports competition in product markets would both strengthen productivity growth and reduce income inequality. In the long term, improving education outcomes, including by reducing the impact of socio-economic background on outcomes, will be central to sustaining high economic growth and reducing income inequality. The minimum wage in Slovakia is set at EUR 280 per month, average salary for year 2007 is 22 700SKK = EUR 748 per month.

References

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