Social & Economic Reforms on the Eve of the EU Accession:

Case of Slovakia

Martin Angelovič & Vladimír BenčResearch Centre of the Slovak Foreign Policy Association, n.o.Hlavná 11, 080 01 Prešov, Slovak Republice-mail: benc@sfpa.sktel./fax: +421 51 7721 018web: www.sfpa.sk

Ukraine, 30.03.2015

About us Established in 1993 as a civic association: think-tank (NGO) Central office in Bratislava and regional office in Prešov (Eastern Slovakia) In 2004: Research Center (non-profit, MFA of the SR is a shareholder) Activities and aims:

Provide independent expert studies of crucial questions of international relations and foreign policy of the SR;

Publish periodical and non–periodical expert publications that serve to deepen knowledge in the field of international relationships and foreign policy of the SR;

Arrange expert events and take part in international scientific co-operation in the field of international relations and security;

Enhance expert discussion on international relations and foreign affairs of the SR;

Create a favorable conditions for the growth of the next generation of Slovak experts in the field of international relationships;

Incite the interest of the wider Slovak public in events throughout the world, as well as a deeper understanding of the significance of foreign policy and its link with domestic policy.

About us no. II. 6 research programs:

European Studies International Security Central and Southeastern Europe (mostly V4, Balkan + Turkey) Eastern Europe (Ukraine, Russia, Central Asia) Economic Policies and Development Assistance Slovak-Ukraine Research and Educational Center (SUREC)

Periodical publications: Foreign Policy (SK), International Issues (EN), Yearbook of the SR foreign policy (SK, EN), SUREC newsletter (SK, UA)

Staff: 7 senior + 4 junior researchers, 3 project managers/assistants Resources: 45% own projects (EU & US funds and donors + Norway

grants), 35% MFA (incl. Slovak Aid) & SK institutions (contracts, grants), 15% contracts (private sec. + Universities), 5% Membership fees

Slovakia – UkraineIndicator Ukraine Slovakia

The population - (July 2014) 44 291 413 5 410 267Area - sq km 603 550 49 035HDI 2014 (total score/ranking in the world)

0,734 / 83 0,830 / 37

Index of Economic Freedom 2014 (total score/ranking in the world )

49,3 / 97 66,4 / 33

Corrupt ion Perceptions Index 2014 (total score/ranking in the world)

26 / 142 50 / 54

Doing Business 2014 (celkové skóre / poradie vo svete) 59,21 / 112 71,73 / 35

GDP per capita in PPP (1993 / 2013)

1 258 / 7 400 7 453 / 24 700

Inf lat ion in % (1993 / 2014) Over 100! / 0,7 25,1 / 1,7Unemployment in % (1993 / 2014)

0,4 / 8 12,7 / 14,4

Public debt in % of GDP (1997 / 2013)

? / 40,6 33,7 / 55,5

Current account balance (2013) 11,92 bil. USD 3,315 bil. USD

Unique reforms in Slovakia 1999-2005

1999 – 2005: Fiscal reform 2000/2001: Banking system reform 2002: Administration reform – 8 higher self-governments,

transfer of competences to municipalities 2003: Tax reform – unitary tax (19% - VAT and income tax),

programming in government budget 2003/2004: Social system reform – decrease of social benefits,

active searching for a job, public works, retraining 2004: Pension system reform – private accounts, private

pension funds 2000-2005: Privatisation of state monopolies

(telecommunication, gas distribution, energetic sector, banks)

Unsuccessful reforms: health care system, educational system, justice

Fiscal and banking system reform Fiscal reform: to increase the effectiveness of the use of public

financial resources Transparency of expenditures

Limitation of state guaranties to private and state owned companies Implementation of EU standards to public administration (ESA 95 + IPSAS, budgeting,

reporting, accounting) Strengthening of the strategic planning

Midterm framework of public finances (multiyear budgeting at least for 3 years), programming in budgeting (aims>activities>budget)

Joint prognosis for public administration New analytical centre of government IPF Macroeconomic and tax prognosis system using independent experts and private sector

Centralisation of financial flows of public administration System of state treasure-house - one account for whole public administration (except

municipalities and higher self-governing units) Creation of the Agency for management of debt and liquidity (ARDAL)

Bank system reform Independence of National bank of Slovakia Strict regulation of banks esp. in the area of loan supervision Paying off “bad” loans in amount if 4,5 bil. EUR Bankrupting “bad” banks and privatisation of the whole banking sector

Tax reform

Aim: support of the production side of the economy, simplicity and effectivity of the tax system

Direct taxes: introduction of flat individual tax for private persons and companies (19%) elimination of dividend, inheritance, gift taxes, and real estate transfer tax elimination of virtually all exceptions, exemptions, deductions, special rates, and

special regimes Indirect taxes

introduction of one single rate of 19% (before: 20% and 14%), 2007 – introduction of decreased VAT rate 10% for pharmaceuticals and health material, 2008 - books and newspapers

harmonisation of excise taxes with EU Results:

shift from direct to indirect taxes radical simplification of the tax system introduction of low nominal rates (at that time lowest in EU)

19% flat individual income tax, 19% corporate tax,19% unified VAT on all goods and services - without any exception

>>> transparent tax system that motivates investments

Changes in income tax rates

191; 5; 10; 15; 20; 25Allowance tax

1915; 18; 25Corporate income tax

192; 2,25; 2,5; 2,75;

10; 20; 28; 35; 38Personal income tax

20042003(in %)

Changes in income tax rates

191; 5; 10; 15; 20; 25Allowance tax

1915; 18; 25Corporate income tax

192; 2,25; 2,5; 2,75;

10; 20; 28; 35; 38Personal income tax

20042003(in %)

Decentralisation of public administration (2001-2005)

Aim: more effective functioning of the public administration, supporting subsidiarity

Transfer of more than 400 competences to municipalities and higher self-government units

Transport, social affairs, regional schools (basic and secondary schools), agriculture, health, construction, regional development ...

Fiscal decentralisation Right to have and manage own taxes of municipalities New distribution mechanism for income tax of private persons New fiscal rules (balanced current budget, limitations for loans)

Programming (Programs of economic and social development + 3-years budget programming)

Problems: unfinished municipalisation: plenty of small villages (not economically effective)

Dual system of public administration in Slovakia

2004decentralisation

New 50 district offices of general administration

??? Missing district level

Some ministries made their own regional units, e.g. 46 Social offices, 8 Educational offices etc.

decentralisation

Pension system reform Aim: sustainable public finances, introduction of 3 pillar system Changes in 1st pillar (continuous system)

increasing the working/retirement age till 62 years, valorisation of pensions based on combination of inflation and wage growth

increasing the meritoriousness (increasing maximum pension limits) contributions at 18% of the assessment base payable solely to the PAYGO contributions at 18% of the assessment base payable solely to the PAYGO

systemsystem (early) old-age pension paid exclusively by the Social Insurance Agency(early) old-age pension paid exclusively by the Social Insurance Agency recommended option particularly for people who will not be able to accumulate recommended option particularly for people who will not be able to accumulate

sufficient pension savings to purchase life annuity at the time of retirementsufficient pension savings to purchase life annuity at the time of retirement Introduction of new 2nd pillar (capitalisation/saving system) since

January 1, 2005 change of ownership: individual pension accounts managedindividual pension accounts managed by private pension

funds, the contribution ratio - 9% DB : 9% DC,the contribution ratio - 9% DB : 9% DC, possibility to choose from conservative, balanced and growth saving strategies, survivors’ pensions (widow’s, widower’s and orphan’s pensions)

minimum 15 years’ period of saving designed primarily for people who will be able to contribute to their pension designed primarily for people who will be able to contribute to their pension

accounts for at least 20-25 yearsaccounts for at least 20-25 years 3rd pillar (supplementary pension saving)

special-purpose saving and the life insurance with tax incentive (400 EUR annually)

Social system reform Aim: increasing targeting of social system and motivation

to work Help to working families

children allowances: single whole territory allowance and tax incentive (motivation for parents to work)

Supporting working mobility Targeted social benefits

decreasing the basic social benefits and introduction of work incentive benefits (activation and motivation benefits)

Changes in unemployment allowance tightening the conditions for applicants, reduction of time for

support Changes in health support allowance

first 10 days of inoperability are paid by employer

Key reforms 2011-2015 Deductions reform (social and health deductions) – “super-gross-salary” – only

employee will pay deductions, not employer + continuously uniting deductions for employees and small entrepreneurs

Constitution law on government budget responsibility (limits for expenditures based on GDP growth + limit for public debt – will be probably 60% of GDP) for future governments + establishing special independent Fiscal Council

Reform of the justice sector – all decisions of the courts will be published at the web page; changes in procedures of elections of judges and career planning of judges and prosecutors …

Reform of the education system - opening market for school books (e.g. teacher/school can decide from which books they will teach); digitalization of schools; independent and regular evaluation and tests of schools quality = changing system of payments for schools – better schools will receive more money; reform of the system that supports research; discussion about introduction of payments for education (students will pay for studying) …

Reform of the health care system: defining minimum state system of health care system (e.g. only few hospitals will receive GOV state financial support, other will bankrupt or will be privatized); independent evaluation of quality of services of hospitals and binding support for best hospitals; changing medicine policy e.g. GOV support only of the cheapest medicine

Reform of pension and social system of military and police service - same conditions as other state servants

Real GDP growth

Sources of GDP growth

Tax reform (2004) 21%

Privatisation by foreign investors (1998-2002) 17%

Entry to the EU (2004) 12%

Labour Code Amendment (2003) 10%

Reforms before 1998 10%

Pension reform (2004-2005) 4%

Other sources 26%

Source: INEKO survey among SK economists, March 2007

Public deficit (% of GDP)

Source: Eurostat

SK and EU Strong synchronization of

economies (SK – export oriented)

SR – healthy banking system Huge inflow of foreign

investment (esp. car industry)

-8

-6

-4

-2

0

2

4

6

2000Q01 2002Q01 2004Q01 2006Q01 2008Q01

-10

-5

0

5

10

15

Eurozóna (ľavá os) Slovensko (pravá os)

GDP, %-growthPublic support of

banking sector in EU 27 during crisis (% of GDP), end of

2011

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

FDI Inflows into Slovakia 1993-2007 (mil. USD)

Regional “status” of SlovakiaGDP per capita to EU 28 average in % 1996 2000 2004 2007 2008 2009 2010 growthPrague (CZ) 128 139 163 177 175 176 172 +44Central Morava (CZ) 65 58 62 64 64 66 64 +1Chemnitz (GE) 81 77 81 83 81 80 83 +2Stuttgart (GE) n.a. 143 139 141 142 133 144 +1Észak-Magyarország (HU) 36 35 41 39 40 40 40 +4Wien (AT) n.a. 182 170 160 161 163 165 -17Mazowiecke (PL) n.a. 74 78 87 89 97 102 +28Podkarpackie (PL) 34 34 35 37 39 41 42 +8Brat islava region 104 109 129 160 167 177 176 +72West Slovakia 48 47 54 66 69 68 68 +20Central Slovakia 41 41 47 54 59 58 59 +18Eastern Slovakia 38 38 42 46 51 49 49 +11

- Slovakia is doing great in economic policy making > growth strategy- but week in fighting with regional disparities + facing local problems→ treat and challenge for the future

Slovakia – cars producing nation

Subcontractors location

Key problems and challenges of SK regional policy

Huge regional differences, big disparities in unemployment → Key question: how to coordinate economic policies ??? → huge debate on priorities

No money to realize regional policy – dependence on EU funds, but big troubles to use them (system set up, project preparation, corruption ...)

New institutional set up (since 1999) – capacity problems even until today

Centralization of decision making and finances, but competences and responsibility at regional level

Wasting of money because of non-consistent policy making – each government different approach (e.g. public works) + corruption

System problems and longtime solutions- „polit icization“, corruption and ineffectiveness (wasting of funds and time) ... at all levels ...- missing strategic polit ical decision (e.g. Finland 50-years strategy for innovations) + year-to-year changing approaches and strategies - programming for the „drawers“- chaotic insti tutional set-up of regional policy making (plenty of institutions at each level, plenty of programmes and funds, bad coordination, problem of capacities ... example: CBC)- problematic territorial division and performance of public administration (??? 3 macroregions + 12/16 counties (zhupa), municipalisation ???) - bureaucracy of EU funds implementation caused by SK institutions- absence of evaluation and „sick“ control (not results, but „bills“)

Further problems ...- balance between the knowledge economy - vs. integration of a large part of unemployed to the labor market (Romas, young, 50 and above ... we need the assembly plants) + integration of regional policy to the economic policy based on long-term priorities (the balance between the center and vil lage) - questions relating to the support of the private sector (not to restrict competition and market economy) - support only public projects??? (labor market, clustering, ...) - fulfillment of the obligations of the Accession Treaty to the EU and international agreements (especially environmental issues ..) - Roma - a comprehensive approach needed to address key development challenges in SR, especially in Eastern Slovakia- flat rates + public infrastructure without competition in submitting projects

Village Kechnec (www.kechnec.sk) 1991: 734 → 2014: 1053 inhabitants (by economic development) – mayor, Mr. Jozef Konkoly is

in charge since 1990 Kechnec Industrial Zone - 332 hectares - green field

First idea in 1996 – buying land from inhabitants – building basic infrastructure – April 2002 Government grant for infrastructure (6,12 mil. EUR) – October 2003 „Grand“ opening of the Zone (1st investor MOLEX Slovakia – US company) – February 2004 Government grant for completion of infrastructure (0,96 mil. EUR) – now more than 15 companies with more than 2500 employees + BMW is cosidering huge investment

GETRAG FORD Transmissions Slovakia, Kuenz-SK, Magneti Marelli Slovakia, SWEP Slovakia, Doppelmayr Slovakia

New Logistic Center opened in 2011 with 10.000 m2 Plan for the Science & Technology Park with TUKE (University) and KSK (Reg. Gov.) New infrastructure built within 10 years:

Social-healthcare complex, Sporting center, Kindergarten with English classes, European Integrated School (Kindergarten, Elementary school , Vocational school, External school of the Engineering Faculty), Apartment complex, Stores + services, Aquapark (under construction), Congress center and cultural house, Open air cinema, Complex renovation of the village center, Plant for meat processing and production of bakery products – village „social“ company, Connecting bridge over the river Hornad to Hungary + plenty of „soft“ projects

Cluster AT+R (www.clusteratr.sk)

Established: 3rd March 2010 as Association of Legal Entities (PPP)Aims: - joint development, research, designing and implementation of automated production systems;-to concentrate R&D capacity, deepen the home specialization profile and participation in international groupings as well as to approach the domestic and international markets with higher complexity and quality of production.-Last success: magnet possitioning system for the Large Hadron Collider (CERN)

The Small Carpathian Wine Route One of six viticultural regions in Slovakia: vineyards covering 7,303.5 ha, which is

about one third of the total vineyard area in Slovakia (22,847 ha). Association established in 1995. It unites vintners, wine-producers, municipalities and

tourism businesses (more than 30 municipalities and almost 250 companies and individuals).

Aim and activities: to foster the development of the Small Carpathian region, especially in terms of tourism connected to its wine-growing and winemaking traditions. The association provides marketing and educational activities for the region and its members, and organizes regional events focused on the promotion of wine and vintners:

Wine competitions Wine festivals + Municipal days Vineyard's day St. Urban’s day of open wine cellars (May) The Day of Open Wine Cellars (November)

http://www.mvc.sk/

Information sources

National Bank of Slovakia: www.nbs.sk Statistical Office of the SR: www.statistics.sk Slovak Government: www.government.gov.sk Ministry of Finance: www.finance.gov.sk Ministry of Transport, Construction and

Regional Development: www.mindop.sk EU structural funds in Slovakia: www.nsrr.sk NGOs’ web sites: www.sfpa.sk, www.ineko.sk,

www.iness.sk, www.ivo.sk, www.mesa10.sk

Thank you for your attention!