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Slovakia: Economic Prospects Brighter Than Expected

London, 20 September 1996 (RFE/RL) -- When the Slovak Republic became independent in 1993, analysts were gloomy about its economic prospects because of its relative underdevelopment, dependence on heavy 'smokestack' industries and reliance on Eastern markets.

But Slovakia has confounded the pessimists because it is emerging as one of the "star" performers of the countries in economic transition.

A forecast published this week by the Paris-based Organization for Economic Cooperation and Development says:

"Slovakia displays one of the best performances among the Central and East European countries."

One reason: labor costs are lower than the Czech Republic, Poland and Hungary, giving its exports a competitive edge. Its good trading performance has helped it recover from the initial shock of transition.

The report says Slovakia, in 1996 and 1997, will achieve one of the highest levels of economic growth combined with one of the lowest inflation rates of any of the Central and East European countries.

The report says gross domestic product, which grew by 7.4 percent last year, is forecast to grow by five to six percent this year and next year. It says inflation, which stood at over 25 percent in 1993, has fallen to around six percent and is likely to stay at that level.

Unemployment, which peaked at 15 percent in 1994 and 1995, has fallen, albeit slowly (to 11.9 percent in May). The budget and current account balance were in surplus in 1995. The national external debt, per capita, is the lowest of all countries in transition. Real wages are increasing. Household consumption grew by 3.4 per cent last year.

The picture is a bright contrast with 1993 when analysts predicted Slovakia faced a difficult road ahead. They said it was handicapped by its dependence on energy imports from Russia and that there was little hope of a resumption of exports to its traditional markets in the East.

Why has Slovakia confounded the pessimists? The OECD report says its rapid economic recovery was led by buoyant exports and, starting in 1995, by a strong improvement in domestic demand.

Slovakia has expanded its exports to Western markets, particularly to Germany. Its main exports, iron and steel, textiles, chemicals and wood products, have made inroads because they are competitively priced.

Compared with the Czech Republic, Poland and Hungary, Slovakia had the lowest labor costs last year (unit labor costs of the four were 20 to 35 percent of Austrian levels), and is likely to retain its cost edge.

Slovakia's exports to the EU increased by a quarter (26.8 percent) in 1995 compared with 1994. Trade with the Czech Republic -- still Slovakia's largest single trading partner with about 35 percent of total exports in 1995 -- shows a declining share of its total exports.

The report says the rapid increase in trade with the West shows that the economy is adjusting to international prices and quality standards. The output of large former state-owned enterprises, and the number of jobs they provide, is falling, and a new private sector based on small and medium-sized enterprises (including those in the service sector) is emerging. This suggests exports may be more diversified in future.

The report says the private sector now accounts for two-thirds of Slovakia's gross domestic product, but the influence of the state still prevails in many large-scale industrial sectors. Moreover, the Slovak government has contributed to uncertainty about the direction of future policies. Its statements often seemed to favor a more interventionist approach. The report is critical of Slovakia's "turbulent" privatization policy, and warns that the banking system "remains a cause for concern."

The country needs to attract more foreign investment. Capital inflows have so far been small compared with other transition countries. Main investors are Austria (21.4 percent), Germany (17.5 percent) and the Czech Republic (16.2 percent). The investment is mainly directed to retail trade, industry, banking and insurance.

Slovakia's high growth rate, led by exports, is being bolstered by stronger demand from domestic consumers and by spending on infrastructure programs. But long-term unemployment is a problem. Slovakia, compared with other transitional economies, has many prime-aged workers with low levels of education. Unemployment shows regional disparities. In Bratislava, it is 4-5 percent compared with 20 percent in other districts. It will remain at about 12 percent.

Although upbeat, the OECD report has a warning: Slovakia's success seems to be grounded on a heavy industrial base inherited from the past, and this is not sustainable on a long-term basis. But its "good short-term economic prospects" provide room for a further development of the private sector, including a shift to services and a lighter industrial base.