Encouraging entrepreneurs: Slovak story Martin Vlachynsky Institute of Economic and Social Studies (INESS)

Encouraging entrepreneurs: Slovak

story

Martin Vlachynsky Institute of Economic and Social Studies (INESS)

Independence: 1993EU: 2004Eurozone: 2009

49 035 km2

5 400 000 inhabitantsGDP (2012) 71,4 billion EUR76% of EU28 per capita GDP averageExports to GDP: 90% (Among highest in the world)

Industry: •Automotive (largest per capita car producer in the world)•Electronics industry •Metallurgy

% GDP growth

Phase 1 (1993-1998)

“A black hole in the heart of Europe”

• Solid Growth

• High, but stabilized unemployment

BUT

• Fiscal expansion (average 6% budget deficit)

• Lack of foreign capital (average FDI only 1,6% of GDP)

• Deteriorating health industries

• Deteriorating banking system (“free” cash source), 6 banks bankrupted

• Authoritative regime- exclusion from western structures (excluded from the Luxembourg summit 12/1997)

Phase 2 (1998-2009)

“Tatra Tiger”

• Unemployment halved

• FDI Growth 1999-2002 reached 1100%

• Catching up with EU accession (negotiations started 2 years later compared to

CR)

• Declining debt to GDP ratio

• World’s 15th soundest banking system (2009), 6th among EU members (2013)

• Ranked 32/155 in Doing Business (2006)

• 2nd East European country to enter Eurozone

Reasons behind

• Bank bailout (12% GDP cost) & sale

• Foreign investors allowed to enter troubled utilities sector (however no price deregulation,

regulatory body independent only formally)

• Improved fiscal and debt management – established Debt and Liquidity Management Agency, mid -

term budgeting, ESA 95 (accrual instead of cash)

• Municipal budget reform (share on tax revenues instead of negotiations)

• Labor code reform - more flexibility in lay-offs and reduced powers of trade unions

• Compulsory private pension pillar established

• Small improvements in legal disputes

• Higher transparency - information right (2000), centralized (2000) electronic public procurement

(2007), contracts published online (2011)

• Bureaucracy improvements (business registry reforms, land registry reforms…)

• Inflows of EU funds (however, especially later in the 2007-2013 period)

• Generous tax breaks

“Flat” Tax Reform:

•Five rates of personal income tax (10%-38%) merged to 19%*

•Corporate rate cleared of exemptions and cut from 25 % to 19 %

•Two VAT rates (14 % and 20%) were unified at 19 %

•Dividend tax, inheritance tax and gift tax were cancelled

•Tax code simplified

Phase 3 (2009-?)

The Crisis

• Reforms stopped in 2006

• One of the biggest crisis related GDP growth drops

• Rising unemployment (among the highest in EU)

• Quickly deteriorating public finance – export trap (GDP growth vs Revenue growth)

• Falling competitiveness (32nd -> 49th)

• Highest corporate tax rate in CEE (2013) - from 19% to 22%

• Tax code more complicated (especially VAT compliance)

• Bank tax among the highest in EU (30x German rate)

• No improvements of extremely low legal framework efficiency (143/148 in GCI)

Competition policy

Annual average (mill. EUR) % of GDPMalta 159 3,86Cyprus 285 2,85Czech Republic 1980 2,8Poland 2140 1,29Hungary 571 1,04Slovenia 139 0,69Slovakia 118 0,51Lithuania 23 0,26Latvia 34 0,24Estonia 7 0,11EU 10 average 5650 1,24EU 15 average 3400 0,04

State aid broadly used by new members: 2000-2003 situation (excluding agriculture and transport)

Competition policy

•First chapter opened, one of the last (28th} closed, lot of problems

•Missing conception (state aid was view as a standard policy tool)

•Negotiations about sensitive exemptions (especially VW and US Steel – transitional period)

•Way of funding state owned enterprises and funds (receiving large guarantees on debts)

•First law version was failure

•Illegal exemptions (forestry companies exclusion etc.)

•Conflicting definition of SME – exempt from scrutiny

•Mechanical copying (EU legal state exempted aid of 15 mill. ridiculous in Slovak reality)

•Controversial Bureau of state Aid (f.1999) – competency problems, allowing illegal aid

Competition policy

•Bureau of state Aid closed 5/2004, competitions moved to Ministry of Finance/Commission

•State aid more systematic and transparent, in respect of EU laws (however, full legal compliance with EU not

until 2009)

•State guaranteed commercial monopolies (post, telecommunication, TV…) turned into licensing system

Number of stimulus

Stimulus sum (EUR) Planned new jobs Cost per job (EUR)

2002 1 12 746 465 582 21 901

2003 1 166 018 388 3 500 47 434

2004 18 313 402 342 8 880 35 293

2005 0 0 0 0

2006 48 357 887 436 15 214 23 524

2007 16 190 038 092 6 113 31 088

2008 5 42 667 673 2 199 19 403

2009 8 75 270 583 2 976 25 293

2010 11 39 067 024 1 350 28 939

2011 10 64 930 195 2 120 30 627

2012 10 121 191 498 2 412 50 245

2013 11 60 853 168 2 459 24 747

Sum 139 1 444 072 864 47 805 30 208

Investment stimulus

Stimulus and Opportunity Cost

Year Corporate tax rate Possible rate cut

2002 25% 24,7%

2003 25% 21,3%

2004 19% 13,9%

2005 19% 19,0%

2006 19% 14,7%

2007 19% 17,0%

2008 19% 18,6%

2009 19% 18,1%

2010 19% 18,6%

2011 19% 18,3%

2012 19% 17,6%

2013 23% 22,3%

Average per job cost represents 5 years of net median wage (more in the early 2000’)

Stimulus spent mainly in richer regions

Below average unemployment

Over average unemployment

Number of stimulus 19 21

Sum of stimulus 978 488 995 465 583 869

Planned job creation 30 167 17 638

• “Chaining” of stimulus (Stimulus to keep jobs created with previous stimulus)

• Relapse from “tax exemptions only” back to direct financial contributions

• Inability to negotiate generally agreed rules (Goals often contradicting - Big? SME? New? Existing? Hi tech? #

of jobs? In poor regions?)

• Number of created greenfield industrial parks failed to attract investors, especially in poorer regions,

resembles socialistic central planning (“One factory for every valley!”)

• Aid in richer regions leads to buying competitor’s employees

• State aid contributed to one-sided economy (Automotive, Electronics)

• Everybody (fulfilling criteria) is entitled, but Ministry of finance decides projects to push to parliament

Conclusion

•Slovak economy was kickstarted within a short time, state aid extensively used•One of the most difficult chapters, government held to the state aid tools as long as possible•Still extensively used, but long term effect disputable

Thank You!

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