Slovakia Economic Analysis Essay

Length: 2211 words

The Slovak Republic, or Slovakia, is located in Eastern Europe with a population of 5.4 million people and borders the countries of Poland, Austria, the Ukraine, and the Czech Republic (The World Bank).  As originally part of the former nation of Czechoslovakia, the Slovak Republic has only recently begun to write its own history (Abizadeh, p. 171).

During 1989 many revolts took place against eastern European governments under communism, including Czechoslovakia (Slovakia.Org, 20th Century).  Both Slovaks and Czechs staged massive protests against communism in Czechoslovakia and ended the communist regime in November 1989 (Slovakia.Org, 20th Century). Under the new non-communist system of government, the two republics of Czechoslovakia were established: the Slovak Republic and the Czech Republic (Embassy of the Slovak Republic).  In June 1990, with the federal and republic-level governments in place, free elections were held for the first time in the country since 1946 (Slovakia.Org, 20th Century).

The main concern of the new government was the transformation of Czechoslovakia from a state-controlled to a free market economy (Embassy of the Slovak Republic).  Disputes arose between the two republics about reform process which focused on privatization, the encouragement of foreign investment, policy of macro-economic stabilization, price

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liberalization, and liberalization of foreign trade (Slovakia.Org, 20th Century).  The Czech Republic was more economically developed than the industrial-based economy of Slovakia (Slovakia.Org, 20th Century).  The transition to a market economy left the Slovak Republic to endure greater economic hardships than the Czech Republic (Sovakia.Org, 20th Century).  For example, the federal government chose to dramatically cut the countrys defense industry, resulting in a large decrease in industrial production and a large rise in unemployment in Slovakia (Slovakia.Org, Slovak Economy).  This took place because the economy that rose out of the communist era in Slovakia was based on industrial production, particularly on weapons and military equipment (Slovakia.Org, Slovak Economy).

There was a great difference of opinions between the Slovaks and Czechs about the nature and pace of economic reform in Czechoslovakia (Slovakia.Org, 20th Century).  The disagreements delayed the reform process and also the acceptance of a new constitution (Slovakia.Org, 20th Century).  It became obvious that the current form of government could meet the demands of both republics.  As a result, Slovakia declared its sovereignty in July 1992, in other words, its laws took higher priority than those of the federal government (Slovakia.Org, 20th Century).  During November the federal parliament chose to officially break up the country, and on January 1 1993, the Slovak and Czech Republic replaced the Czechoslovakia as two independent countries (Abizadeh, p. 171).

Recent Growth levels of the Slovak Economy

The economic problems that began in the early 1990s still  plagued Slovakia after it claimed independence in 1993 (Abizadeh, p. 172). After its first year of independence Slovakias economy was in poor shape with a negative GDP growth of 3.7%, and inflation rate of 25.1%, and an increasing unemployment rate of 14.4% (National Bank of Slovakia).  Overall, gross domestic product in Slovak Republic decreased a substantial 23.7% during the years 1990 to 1993.  Through a slow reform process, however, positive macro-economic results have been accomplished over the recent years (Slovakia.Org, Slovak Economy).  GDP growth has been positive since 1993 and recorded an annual growth of 4.4% in 1998 (The World Bank).  Slovakias 1998 GDP per capita  of 3,832 USD was very competitive with other central European countries (Embassy of the Slovak Republic).

The budget deficit has been brought under control, and at the beginning of 1999, the inflation rate of 5.6% was the lowest among all transition economies (Embassy of the Slovak Republic). The decline in the inflation rate was due to developments in the capital markets and the banking sector, a decrease in food prices, price deregulation, and lower producer prices (Abizadeh, p. 172). Unemployment, on the other hand, is still a major problem in the Slovak republic. Since the end of the communist regime the rate of unemployment has been 10% or higher with no signs of improvement (Slovakia.Org, Slovak Economy).  Unemployment is related to the consistent regional disparities and the inevitable restructuring of large companies (Embassy of the Slovak Republic).  The most important part for Slovakia to convert to a market economy is to continue privatization of state-owned businesses and capital formation within the country (Abizadeh, p. 171).

Although the privatization of small firms is complete, this sector still faces challenges such as government policy that favors large enterprises, obtaining financing at affordable interest rates, and an increase in corruption and organized crime (Tradeport). The privatization of large enterprises has also begun.  Two major banks have been recently declared available for privatization (Tradeport).  A government policy has also been approved that will allow the privatization of up to 25% of Slovak telecommunication (Tradeport).

The governments efforts toward privatization have been limited by the amount of capital available in the Slovak economy (Tradeport).  Unlike the past, the government is now encouraging foreign investors to participate in the privatization process to provide the needed capital (Abizadeh, p. 178).  However, foreign investors seem to have a wait and see view involving changes in government policy that could open or close doors to industry growth and the return on investments (Tradeport).

The three primary sectors of the Slovak economy are services, industry, agriculture, and construction (Embassy of the Slovak Republic).  These sectors make up the following percentages of GDP in 1998 of 20.1 billion USD:

The increase in services over the years is due to Slovakia converting to a market economy (Embassy of the Slovak Republic).  Agriculture has remained stable throughout the transition process (Embassy of the Slovak Republic).  At the end of 1998, output from the private sector was responsible for 83.1% of GDP compared to 39% in 1993 (Embassy of the Slovak Republic).

The main service areas include transportation, telecommunications, and banking and insurance services (Abizadeh, p. 172).  Because of the increase in domestic demand in 1996, new service areas were developed such as real estate firms, computer engineering, and sports and cultural activities (Abizadeh, p. 172).

The Slovak industry that evolved out of the Communist era had become inefficient and produced goods that could not compete in the world market (Slovakia.Org, Slovak Economy). A major part of this industry was heavy industry, which was aimed towards arms production (Abizadeh, p. 172). The demand for arms production decreased after the breakup of the Soviet Union and the development of many eastern European countries (Abizadeh, p. 172). Industry is still an important part, however, in the growth of GDP and employment (Embassy of the Slovak Republic).  Firms with more than a thousand workers, mostly state-owned companies, account for the largest share of the production of goods (Embassy of the Slovak Republic).  The small and medium sized firms, which represent the private sector, are not responsible for a relatively large proportion of goods production (Embassy of the Slovak Republic).

Overall, state-owned companies are still dominant in industry (Embassy of the Slovak Republic). Slovakia can increase its productivity the most by applying improved technology and processes to industry (Embassy of the Slovak Republic). However, foreign investment is required to continue modernizing industry and retraining workers (Slovakia.Org, Slovak Economy). Manufacturing is one of the key sectors in the Slovak Republic (Slovak.Org, Slovak Economy).  Exports of manufactured products are responsible for almost one-fourth of total production (Embassy of the Slovak Republic). Manufactured goods range from assembly lines and consumer goods to large investment operations such as plant construction (Embassy of the Slovak Republic). Top manufacturers produce steel, petroleum products, machinery, chemical products, ceramics, processed food, and textiles (Embassy of the Slovak Republic).

The fuel sector involves activities including coal mining, purchasing, transportation, and distribution of natural gas, crude oil, and gas recovery (Embassy of the Slovak Republic). The power sector includes generating electricity, distribution and sales of heat, and construction and assembly works (Embassy of the Slovak Republic).

The Slovak Republics principal mineral resources are lead, copper, manganese, zinc, iron, and lignite (Slovakia.Org, Slovak Economy).  Mining was unable to compete in the market economy after Communism fell in Czechoslovakia in 1989 (Slovakia.Org, Slovak Economy).

Representing one-seventh  of the total production in Slovakia, the metallurgical industry produces nearly five million tons of crude steel annually which is processed primarily into plates, strips, ingots, and seamless and non-seamless tubes (Embassy of the Slovak Republic).  Because supply exceeds domestic consumption, one-third of metallurgical goods are exported (Embassy of the Slovak Republic).

The chemical industry represents nearly 18% of the total industrial output in the Slovak Republic (Embassy of the Slovak Republic).  Most plants are located in the capital of Bratislava (Embassy of the Slovak Republic). Many projects have been proposed, in conjunction with foreign companies, that involve organic and inorganic chemistry, plastic production and processing, the production of chemical fibers, and painting materials (Embassy of the Slovak Republic).

The clothing industry is focused on brand clothing with the use of new materials (Embassy of the Slovak Republic).  The production of footwear is concentrated on luxury footwear for men and women as well as sports footwear (Embassy of the Slovak Republic).

The most important crops in the Slovak Republic are wheat, maize, potatoes, barley, and sugar beet production (Embassy of the Slovak Republic). Livestock including cattle, pigs, sheep, and poultry is also important in agriculture (Slovakia.Org, Slovak Economy).Viticulture, the cultivation of grapes, is practiced on some mountain slopes in Slovakia (Slovakia.Org, Slovak Economy). A small amount of tobacco is also grown in the Vah River valley (Slovakia.Org Slovak Economy). Much of the landscape in Slovakia is made up of rugged mountains in the northern and central regions, however, one-third of the land in Slovakia is cultivated (Slovakia.Org, Slovak Economy).  Despite steady growth in economic results since 1993, substantial growth in agriculture cannot take place because of the soil, topographical characteristics, and the need for technology and updated machinery (Abizadeh, p. 172).

Large construction companies play a key role in industry (Embassy of the Slovak Republic).  The production of building materials has increased in recent years as Slovakia converts to a market economy (Embassy of the Slovak Republic).  Future developments in the industry will highly depend on the amount of investment that is needed for further construction and reconstruction activities (Embassy of the Slovak Republic).

International trade is an important and essential part of Slovak economic growth (Abizadeh, p. 173).  The total volume of foreign trade in Slovakia increased by 16% in 1998.  Economic growth in the future will depend on the countrys export performance (Embassy of the Slovak Republic). Slovakias primary exports include consumer goods, machine and machine equipment, industrial products, chemicals, raw materials, natural fuel, and foodstuffs (Embassy of the Slovak Republic). Exports increased by almost 16% in 1998 (Embassy of the Slovak Republic). Leading imports in Slovakia increased by 16.4% in 1998, which included machine and machine equipment, natural fuels, consumer goods, chemicals, industrial products, foodstuffs, and raw material (Embassy of the Slovak Republic).  Foreign trade with European Union countries increased 35.4% in 1998 as compared to 1997 (Embassy of the Slovak Republic).

The European Union is the Slovak Republics main trading partner, which accounted for 52.9% of foreign trade in 1998 (Embassy of the Slovak Republic). An Association Agreement was made between the European Union and the Slovak Republic in 1993 which has had substantial implications for foreign investment and trade in Slovakia (Embassy of the Slovak Republic). The Slovak Republic applied to the European Union in 1995 (Embassy of the Slovak Republic).  Accession to the European Union is now the main economic and political objective of the Slovak Republic (Slovak Web).

Slovakia and the World Trade Organization

The former Czechoslovakia became part of the General Agreement on Tariffs and Trade in 1947 (World Trade Organization).  After its independence, the Slovak Republic became a member of the World Trade Organization on January 1, 1995 when the GATT was replaced by the WTO as a permanent international organization (World Trade Organization).  One of the main principles of Slovakias foreign trade policy is to continue the liberalization of exports and imports (Embassy of the Slovak Republic).

This principle is best applied by using market mechanisms to promote exports while protecting domestic producers and consumers (Embassy of the Slovak Republic).  The WTO provides the framework for Slovakia to apply the use of market mechanisms to promote free and fair trade among domestic and foreign companies, all in conformity within international law (Embassy of the Slovak Republic).  Unlike the GATT, the WTO deals with tangible as well as intangible goods.  This is important to the Slovak Republic because of the increase in services during recent years.

References:

Abizadeh, Sohrab.  The Return of Mitteleuropa.  Commack, New York: Nova Science Publishers, Inc., 1998.
Embassy of the Slovak Republic, Business and Economy, Washington, D.C., December 1999.  (Located in the World Wide Web at http://slovakemb.com).
National Bank of Slovakia, Selected Macro-economic Indicators, Bratislava, Slovak Republic.  (Located in the World Wide Web at  http://www.nbs.sk).
Slovakia.Org, Slovak Economy.  (Located in the World Wide Web at  http://www.slovakia.org).
Slovakia.Org, 20th Century.  (Located in the World Wide Web at  http://www.slovakia.org).
SlovakWeb, The Slovak Republic and Its Economic Development, 1999, (Located in the World Wide Web at http://www.slovakweb.com).
The World Bank Group, Slovak Republic at a Glance.  (Located in the World Wide Web at http://www.worldbank.org).
Tradeport, Slovakia Economic Trends and Outlook, September 1999.  (Located in the World Wide Web at   http://www.tradeport.com).
World Trade Organization, About the WTO, Geneva, Switzerland,      March 2000.  (Located in the World Wide Web at http://www.wo.org).

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