Slovakia's Reforms Deserve Second Look
The go-slow approach of the country's premier has been criticized, but it appears necessary to correct past mistakes and chart a better way forward
Central Europeans have become used to permanent revolution over the past 17 years and are still being urged to make further reforms to catch up with Western Europe and cope with global competition. Any politician who questions this is condemned as "anti-reform," as if that ends the argument.
Reform should be a banned word for journalists covering central Europe. Its unqualified use implies that the tide is going only one way and that you can either go with the flow - preferably as speedily as possible, catching the wave and being borne aloft - or you can futilely rail against it, march into the waves and drown.
But there is not just one model that central European societies must adopt. Western Europe has diverse economic models ranging from the United Kingdom's free market to the French social market, and it is a political decision which one a new member should adopt. To demand "reforms" begs the question of which direction the reforms should be heading.
Before applauding reforms one must also examine the content, to see if they are really needed and well prepared, as well as the timing, because it can sometimes be better both politically and economically for governments to take their time introducing complex and painful changes.
Robert Fico, Slovakia’s leftist premier since July, has suffered more than most from this simplistic misperception of reform.
His rightwing predecessor, Mikulas Dzurinda, pushed through the most radical reform program in the region. Economists and business people were so enamored that they cited Slovakia as a model for sclerotic Western Europe. Conversely, Fico was disparaged as the anti-reform candidate who would try to turn the clock back.
Business was therefore shocked by the scale of Fico’s victory and his decision to opt for the "worst case" scenario of a coalition of his Smer movement and two nationalist fringe parties.
Fico’s initial lukewarm commitment to adopting the euro in 2009 led to a plunge in the value of the Slovak crown at the end of June. The central bank spent more than 3 billion euros - around one quarter of its reserves - trying to arrest the crown’s fall before Fico and his business-friendly finance minister, Jan Pociatek, were able to restore confidence in the euro timetable.
Since that inauspicious start the worst fears have not been realized. Many of Fico’s campaign promises have been cut back and the reform framework has been preserved. For example, the flat income tax has been maintained, though personal allowances have been reformed to force high earners to pay more tax.
The crown is now at record levels and the rating agency Moody’s even increased Slovakia’s credit rating in October to A1. The country is likely to be chosen as the site of a huge new LCD plant by Samsung, demonstrating that foreign investors remain bullish.
Economists and business people now damn Fico with faint praise, commending him for making only minor changes to Dzurinda’s reforms, as if anything his government did would necessarily be negative. They now either see his government as a giant waste of time or, if they are charitable, as a period when the country treads water and catches its breath before another giant wave of reforms.
TRIED AND FAILED
This overlooks first of all the problems with Dzurinda’s reforms. Many were successful but others, notably in the more complex areas of health care, education, and welfare, either failed or created huge discontent or both.
For example, long-term unemployed - primarily Roma - were forced to do unskilled manual work just to receive a lower level of benefits than they had previously been entitled to. The aim was to cut welfare spending and improve incentives to work. However, given that many Roma live in areas of very high unemployment and discrimination, this simply deepened poverty and alienation.
The reforms were also shallow because the Dzurinda government did not tackle the issue of how they would be administered. The impact of the reforms was eroded by a state administration and local government that remained overstaffed, inefficient, and obstructive. Ironically for a government that liked to boast about attracting foreign investment, a good example of this is Sario, the investment promotion agency, which remains a pale shadow of CzechInvest, its Czech counterpart.
The reforms also ignored the chronic unemployment and poverty in eastern Slovakia. Bratislava and western Slovakia boomed, but for those in the east migration was the only way out. Only at the very end of his government did Dzurinda target investment incentives at eastern Slovakia and accelerate motorway building to link it the west.
Using the healthy economy he has inherited from Dzurinda, Fico plans both to improve the reforms and address problems that have been neglected. For example, social benefits are being increased to tackle poverty, while Pociatek plans big cuts in state administration through an ambitious e-government revolution.
In other fields Fico’s party - true to its Slovak name - plans to go in a different direction altogether. The flawed and unpopular health-care reform has already been canceled, while next year the Social Affairs Ministry should reform Dzurinda’s liberal labor law, aiming to restore workers’ and trade union rights and to maintain the flexibility that employers crave.
Overall, Fico’s reforms will be much more modest than Dzurinda’s, but it is often essential to pause in order to assess and correct the impact of reforms and to build popular support for the next step.
It should not be forgotten that Dzurinda never really had a popular mandate for his bold reform program. Most of the reforms were at best sketchy before his coalition’s narrow election victory. His government rushed the implementation of the reforms because it knew it would never have a second chance.
By contrast, Fico now enjoys record electoral support and is in a strong position to win the next election and push through further reforms at a time and pace of his own choosing.
Robert Anderson is a Prague-based correspondent for the Financial Times. The opinions expressed in this article represent his personal views.
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