SLOVAK REPUBLIC
Rank: 40 Regional Rank: 21 of 41
T
he Slovak Republic’s economy is 68.4 percent free, according to our 2007 assessment, which makes it the world’s 40th freest economy. Its overall score is 0.8 percentage point lower than last year, partially reflecting new methodological detail. The Slovak Republic is ranked 21st out of 41 countries in the European region, and its overall score is equal to the regional average. The Slovak Republic enjoys high levels of investment freedom, trade freedom, financial freedom, and business freedom. The average tariff rate is low, although non-tariff barriers include distortionary EU subsidies, and business regulation is efficient. Foreign investment is actively promoted, and foreigners are subject to remarkably few regulations in almost all areas of the economy. The financial sector has benefited significantly from an aggressive privatization campaign by the government. The Slovak Republic is weak in freedom from government, property rights, and freedom from corruption. Total government spending equals almost two-fifths of GDP. The judiciary is independent of political influence, but cases take years to resolve, both for citizens and for foreign investors. The level of corruption in the judiciary and civil service is significant by modern European standards. BACKGROUND: Slovakia became independent following its peaceful “Velvet Divorce” from the former Czechoslovakia in 1993. Elections scheduled for September 2006 were moved up to June because of the departure of the New Citizen Party and the Christian Democratic Movement from the coalition government. Although Robert Fico’s Smer–Socialist Democratic Party failed to gain an overall majority, he announced that he would form a coalition. The reforms implemented by former Prime Minister Mikulas Dzurinda have led to low labor costs, low taxes, and political stability that make Slovakia one of Europe’s most attractive economies, especially for automobile and other manufacturing.
The economy is 68.4% free
100
80
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60
40
Europe Average = 67.5 World Average = 60.6
20
0
1995
2007
QUICK FACTS
Population: 5.4 million GDP (PPP): $78.7 billion 5.5% growth in 2004 4.1% 5-yr. comp. ann. growth $14,623 per capita Unemployment: 14.3% Inflation (CPI): 7.5% FDI (net inflow): $1.3 billion Official Development Assistance: Multilateral: $171 million Bilateral: $64 million (2% from the U.S.) External Debt: $22.1 billion Exports: $25.2 billion Primarily vehicles, machinery, electrical equipment, base metals, chemicals, minerals, plastics Imports: $25.6 billion Primarily machinery, transport equipment, intermediate and other manufactured goods, fuels, chemicals
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
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SLOVAK REPUBLIC’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 71 76.6 93 60.8 76.7 70 80 50 43 62.5
0
enterprises and utilities. Consequently, an additional 10 percent is deducted from the Slovak Republic’s monetary freedom score to account for these policies.
L L L L L L L L L L
50 100
INVESTMENT FREEDOM — 70%
There is no screening process for foreign investment, and full foreign ownership is permitted in some cases. Foreign ownership is limited to 49 percent of the natural gas company, the electric power producer, electricity distributors, and an oil pipeline, and the state retains ownership of the railroad rights of way, postal services, water supplies (but not suppliers), and forestry companies. Residents may establish foreign exchange accounts when staying abroad or with permission of the National Bank of Slovakia; nonresidents may hold foreign exchange accounts. There are very few controls on capital transactions, except for rules governing commercial banking and credit institutions, which must abide by existing banking laws.
100 = most free,
= world average
BUSINESS FREEDOM — 71%
The Slovak Republic has been making considerable progress in improving its business environment. Starting a business takes an average of 25 days, compared to the world average of 48 days. Obtaining a business license is relatively simple, but closing a business can be somewhat difficult and time-consuming. The overall freedom to start, operate, and close a business is relatively well protected by the national regulatory environment.
FINANCIAL FREEDOM — 80%
The Slovak Republic has implemented an aggressive privatization program and has adopted reforms to bring its financial sector into line with European standards. Interest rates have been completely liberalized, and credit limits have been abolished. The banking sector, which dominates the financial sector, was composed of 18 Slovak incorporated banks and six licensed branches of foreign banks as of December 2005. The Slovak Republic has sold most state-owned banks, and only one medium-size bank remains fully owned by domestic owners. Foreign capital controls 97 percent of the banking sector. The insurance sector is growing but remains limited. Capital markets are small, and trading on the two exchanges is relatively light. Pension administration companies are required to invest at least 30 percent of their assets in Slovakia.
TRADE FREEDOM — 76.6%
The Slovak Republic’s trade policy is the same as those of other members of the European Union. The common EU weighted average tariff rate was 1.7 percent in 2005. Various non-tariff barriers are reflected in EU policy, including agricultural and manufacturing subsidies, regulatory and licensing restrictions, and other market access restrictions. The enforcement of intellectual property rights is weak, licensing and government procurement regulations are burdensome and non-transparent, and corruption can be a problem. Consequently, an additional 20 percent is deducted from the Slovak Republic’s trade freedom score.
FISCAL FREEDOM — 93%
The Slovak Republic enjoys relatively low and flat tax rates. Both the income and corporate tax rates are a flat 19 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 18 percent.
PROPERTY RIGHTS — 50%
The judiciary is independent and effective, although decisions can take years. Slovak courts recognize and enforce foreign judgments, subject to the same delays. Corruption is present in the court system.
FREEDOM FROM CORRUPTION — 43% FREEDOM FROM GOVERNMENT — 60.8%
Total government expenditures in the Slovak Republic, including consumption and transfer payments, are high. In the most recent year, government spending equaled 39.3 percent of GDP, and the government received 9.4 percent of its revenues from state-owned enterprises and government ownership of property. Corruption is perceived as significant. The Slovak Republic ranks 47th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 62.5%
The labor market operates under relatively flexible employment regulations that could be further improved to enhance overall productivity growth. The non-salary cost of employing a worker is high, but dismissing a redundant employee is not costly. The government’s efforts to reform the labor codes, which began in 2003, have contributed to increasing labor market flexibility.
MONETARY FREEDOM — 76.7%
Inflation in the Slovak Republic is moderate, averaging 4.4 percent between 2003 and 2005. Relatively unstable prices explain most of the monetary freedom score. As a participant in the EU’s Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. The government also influences prices through regulation and state-owned
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2007 Index of Economic Freedom