Slovakia: The Hong Kong of Central Europe?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Slovakia, a paradise for investors, could lead the “old Europe” toward a more free-enterprise, entrepreneurial era.

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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