Slovakia: The Hong Kong of Central Europe? 

Slovakia could become the world's next Hong Kong or Ireland, a beacon of democratic capitalism, a paradise for investors: this is the bright future that Steve Forbes, owner of the prestigious Forbes business magazine, is holding out to this small Central European country.

"The Slovak Republic is set to become the world's next Hong Kong or Ireland, i.e., a small place that's an economic powerhouse," the U.S. multimillionaire writes in an online article due out in print on 11 August. "Foreign direct investment in this country of 5.4 million people has grown from $2 billion to $10 billion since 1999," with investors attracted by a skilled, well-educated, loyal workforce operating at "true bargain" rates of $3 to $4 an hour. The political system is stable, and the country is set to join the EU in 2004.

The picture could become brighter still, Forbes believes, if the government delivers on its plans to introduce a 19 percent flat tax rate, cut welfare and health care spending, and reform its pension system.

Forbes, whose article is based on a speech he gave in Slovakia on 10 July, goes so far as to argue that "if Slovakia remains on its reform path, it could become the domino that pushes the rest of the EU, particularly 'old Europe' nations Germany and France, toward a more free-enterprise, entrepreneurial era."

The Slovak economy certainly appears to be performing well at the moment, and despite political tensions and scandals within the four-party coalition, the government of Mikulas Dzurinda so far seems determined to carry through on its economic reforms.

According to data from the Business Alliance of Slovakia (PAS), which represents medium-sized and large companies, the functioning of the political system improved by 3.3 percent between April and June, while the overall business environment index (IPP) rose 0.4 percent. The biggest improvement was in commercial law and business legislation (3.5 percent), but right at the top of its ratings comes access to financing, such as loans and the capital markets.

Forbes is not alone in its praise. The British news magazine The Economist in January hailed Slovakia as having the “world’s best rules on collateral.”

Ratings such as these have helped to encourage multinationals such as IBM, Kimberly-Clark, Volkswagen Dura, Johnson Controls, Delphi, and Molex to come and manufacture in Slovakia.

However, Robert Kicin of PAS believes that now, “the most interesting issue for foreign investors is the tax reform, the flat tax of 19 percent.”

THE CLOUDIER PICTURE

Surprisingly, the response in Slovakia, a country whose reputation was dragged down for much of the 1990s by the strong-arm leadership of Vladimir Meciar, has been almost total silence. No paper or journal has yet carried any comment on Forbes’ statement, and his glowing praise has barely featured in the news columns.

Others, though, are more willing to comment, and the picture drawn by investors and businessmen is not as bright as the one Forbes paints.

Businessmen polled by the PAS argue that Slovakia is too bureaucratic and corrupt, while foreign investors face many administrative difficulties.

Legislation is also attacked. "A traditional barrier to the business environment improvement was the comprehensibility, applicability, and stability of legislation," says the PAS survey.

The functioning of the judicial system remains a problem. Many cases take years to wend their way through the courts. Slovaks are now among the most frequent plaintiffs in the European Court of Human Rights in Strasbourg, and the government regularly loses when charged with unduly long court proceedings.

And while The Economist has praised the law on col lateral, the state itself is a big debtor.

"Some say Slovakia is a gem of central Europe. Yet the state owes the public pharmacist--via the health care insurance companies--more than 6 billion crowns [over $150 million]" says Peter Mihalik, head of the Slovak Chamber of Pharmacists. He believes that unclear laws have made the factoring market--the trade in debt--largely defunct, particularly in the health sector.

Corruption, as Forbes admits, is also a problem, with the critics saying that, while the government has passed new anti-corruption laws, enforcement is limited, with too few cases reaching the courts--and none of the largest and most public cases resulting in convictions.

Some investors also believe that the government is failing to provide sufficient support to investors. Despite government promises of assistance, the French company Plastic Omnium complains that it took a year for the state to remove high-voltage electricity pylon wires that led across its newly built factory. The American company Molex, owner of a manufacturing company in eastern Slovakia and on the list of notable investments mentioned by Forbes, told the daily SME that the government had promised it a long tax holiday when it arrived in 1999 but was not told that it would end with Slovakia’s entry into the EU, due next May.

In some cases, investors have preferred to close up shop and go elsewhere. Germany’s RWE Trading found Slovakia too difficult to work in.

However, this was a problem that it also found in other Central and Eastern European countries.

Kicin of the PAS believes such drawbacks should not cloud over the economy’s prospects. Even though EU membership will spell the end to certain types of tax incentives for foreign investors, this should not discourage the investors. "Political stability is more important," he argues.

"Our survey shows that, despite the problems companies complain of, Slovakia has made slight progress in all areas, macroeconomic as well as microeconomic. The positive results of the reforms will definitely outstrip the negatives," says Kicin.

EU membership should also help to alleviate one of the country’s other major drawbacks: its lack of modern infrastructure. The network of highways is concentrated in the western part of the country, and road links to the poorer eastern region remain a problem. The government plans to use European funds available from next year to develop the road system.

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