1.2 Economic context

Wednesday, 04. May 2011, 21:10


1.1 Geography and sociodemography




1.3 Political context

Since 1990, the formerly centrally planned economy has been transformed into a market economy. Economic performance in terms of GDP per capita (according to PPP) in 2008 has reached approximately 66% of the average performance of OECD countries (OECD, 2010).

The development after 1990 was heterogeneous. Periods of considerable pro-reform policy alternated with periods of slump. The first elementary market reforms were launched by the shock method in the period 1990–1992. The main measures adopted were the liberalization of prices and foreign trade, the introducion of privatization, macroeconomic stabilization, tax reform and implementation of basic legislation for entrepreneurship. This difficult set of reforms was implemented at a time of unfavourable developments in the economy. Real GDP decreased, price levels rose dramatically, real wages decreased and unemployment rose. A large trade deficit and recurring currency devaluation reflected the low competitiveness of the economy.

After the establishment of Slovakia in 1993, economic policy changed significantly until 1998. The government aimed to find “the Slovak way of transition”. This model led to a standstill in reforms, the strengthening of state involvement and paternalism, and political pressure on economic decisions. Despite this, economic growth recovered (due to an expansive fiscal policy and growing external demand), the inflation rate declined and real wages grew. Although the growth in the economy was rapid, it was accompanied by large deficits and debts in the public sector, a current account deficit and low levels of foreign direct investment (FDI).

This emphasized the necessity for further reforms. In the period 1999–2001, the economy returned to a reform trajectory and macroeconomic stability was achieved. The recovery and privatization of the banking sector brought an end to political influence on credit allocation; public finances and privatization methods became more transparent; and an FDI-friendly business environment attracted foreign investors, which contributed significantly to economic restructuring. Furthermore, Slovakia joined the ranks of the OECD in late 2000. Achieving macroeconomic stability led to a temporary decline in economic growth and a rise in unemployment and inflation. Yet this macroeconomic operation provided a basis for subsequent economic and social reforms. The reform of public finances (including tax reform), pension reform and health care reform were the most significant components of the reform strategy in the period 2002–2006. A new set of measures supported investment and continued deregulation and privatization (for example, of public utilities and the energy sector), while the role of the state in the economy decreased. The macroeconomic parameters improved gradually: the acceleration of economic growth was accompanied by a decreasing unemployment rate, acceptable rates of inflation and current account deficit, and a consolidation of public finances. EU accession in 2004 further harmonized the institutional economic framework with EU Member States.

In 2006, the government declared the creation of a welfare state to be one of its aims. The coalition of centre-left parties brought into government by the 2006 elections has increased the role of the state in both society and the economy, with the aim of building a modern welfare state (combining high economic competitiveness with social security). In the period 2006–2008, positive macroeconomic trends continued. Strong economic growth (up to 10.6% in 2007, see Table 1.2) was accompanied by a  satisfactory state of macroeconomic stability. Moreover, in 2008, Slovakia met the euro convergence criteria and replaced the domestic currency with the euro in 2009. The impact of global recession has been noticeable since the fourth quarter of 2008. After a record growth of GDP in 2007 (10.6%), this percentage slowed to 6.2% in 2008. In 2009, Slovakia moved decisively into recession (-4.7%). Although the GDP outlook for 2010 was positive (+3.9%), unemployment is expected to rise from 9.6% in 2008 to 14.2% in 2010 and deficits in public finances are rapidly increasing (6.8% of GDP in 2009 and 7.8% of GDP in 2010).

Since the transition years in the early 1990s, the structure of production has changed markedly. The traditional branches of heavy industry collapsed. FDI helped to expand the automotive industry, the electronics industry and the financial services sector. Three large automobile companies and their supplier network formed the basis of the economy. The dependence on the car industry and the lack of diversification turned out to be a burden for the economy when the global economic crisis led to a recession in 2008. The competitiveness of the economy is still, to a large extent, determined by low labour costs.

Table 1.2: Macroeconomic indicators

Macroeconomic indicators