Finance minister of the year 2004: Miklos has no time for bullies

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By:
Julian Evans
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Slovakia boasts the fastest growth rate in central and eastern Europe as it turns from regional laggard to leader. It has boosted growth, controlled government spending and attracted FDI with a tax policy some of its larger neighbours dislike. They won't intimidate finance minister Ivan Miklos.

IVAN MIKLOS, FINANCE minister of Slovakia, has a history of standing up to bullies. As a professor at the University of Economics in Bratislava during communist rule, he lectured on how a centrally planned economy without private property was doomed to failure.

He was also at the heart of the People Against Violence anti-communist movement, which played an important role in the fall of the communist regime in the former Czechoslovakia.

The People Against Violence movement became the dominant party in the first post-Soviet government, and Miklos became an adviser to the deputy prime minister for economic transition. He rose quickly up the political ladder, being appointed first the general director of social and economic policy and then minister of privatization within the space of a year.

Then, in 1992, disaster struck for the liberal party. The Czechoslovak population blamed it for high unemployment and inflation, and it failed even to attract enough votes to win a seat in parliament. Instead, the party of nationalist politician Vladimir Meciar won the most votes, and Slovakia embarked on a totally different direction for the next five years.

"It had a very significant negative impact for the country," remembers Miklos. Meciar headed the movement that led Slovakia to split from the Czech Republic in 1993. His nationalist rhetoric also alienated western countries at a time when other central European countries were rapidly integrating with the west.

Miklos says: "Slovakia ended up being completely isolated, and excluded from organizations such as the OECD or Nato, which our neighbours were joining." The country also suffered economically. "It was on the edge of a serious financial crisis when Meciar finally left office in 1998."

Miklos found himself standing up to the authorities once more, when he was appointed by the opposition to the supervisory board of the national property fund. "We had a very dirty and crony-capitalist privatization scheme here, and I was a well-known and open-speaking critic of this, so the opposition thought I might be able to stop the abuses," he says.

However, the property fund refused to cooperate when Miklos tried to investigate transactions, and he resigned in protest. The controversy this caused might have played a part in ejecting Meciar from government in 1998.

Miklos also kept busy during the liberal movement's wilderness years by establishing a think-tank, MESA 10, to promote economic reforms. It has provided many advisers to present cabinet ministers.

When he joined the new Democratic Party-led government in 1998 as deputy prime minister, Miklos had one main aim – to catch up with the other central European countries. Slovakia has achieved that, in perhaps the most remarkable turnround story in central and eastern Europe.

Andrew Roberts, analyst at Citigroup, says: "Generally speaking, the government has done extremely well in Slovakia. Its GDP growth rate this year, at around 5%, is the highest in central Europe. It has kept fiscal policy on a tight leash, pushed through some controversial but much needed structural reforms, and generated an extraordinary pipeline of FDI."

Under Meciar's populist and crony-ridden government FDI stayed low. However, Miklos, together with the previous finance minister, Brigita Schmögnerová, has taken several bold measures to turn the country into an investors' paradise.

Competitive tax policy

This year, the government introduced a flat tax of 19% for companies and for individuals earning more than Sk80,000 ($2,400) a year. It also unified the VAT rate at 19%. The government has pushed through labour market reforms, making the country one of Europe's most competitive and business-friendly environments.

The results are telling. FDI has risen from $2 billion in 1999 to over $10 billion. Car manufacturers have been particularly attracted to the country, with Peugeot, Porsche and Volkswagen all building factories there. In February, Hyundai said it would build its first central European production base there too, after it considered proposals from several other European countries.

Miklos says: "FDI is so important because we need to restructure the economy as soon as possible, and we don't have the domestic resources to do it. We also have high unemployment [at around 15%] so need the private sector to generate more jobs."

The ministry of finance has also made strides in public finance reform. Through politically risky austerity measures, it has managed to reduce the fiscal deficit from 5.7% in 2002 to 3.5% last year, one of the lowest levels of all the countries that acceded to the EU in May. It has also reduced the ratio of public expenditure to GDP from 49% in 2002 to 45% in 2003. Miklos forecasts it will fall to 40% by 2006.

The government is now preparing a new law that would decentralize budget powers to municipalities. It is a characteristically Miklosian reform, designed to improve performance by increasing responsibility and autonomy.

Portfolio investors have been taking note. Slovakia made a rare visit to the Eurobond market in May this year. The deal was launched amid some of the worst turbulence emerging markets have experienced since 1998, and many new issues from the region were pulled. Despite this, the sovereign managed to launch a e1 billion bond at 18 basis points over mid-swaps – the tightest spread ever for a CEE sovereign.

Voice of the new EU

The minister has even targeted his reformist zeal at his own ministry. He reduced its headcount by 30%, from 850 to 599, hired international firm Logica to take a procedure audit of the ministry, and raised the salaries of those who remained by about 30%. "We're now the only ministry which doesn't have a problem attracting talent from the private sector," he says.

Slovakia has certainly caught up with its neighbours in terms of integrating with the west. It joined the OECD in 2000, and Nato in the second wave of accession. And, of course, the country joined the EU in May 2004.

Within EU power politics, Miklos has again proved himself adept at standing up to bullies. Specifically, he was the most vocal critic when France and Germany broke the Stability and Growth Pact late last year, making it clear that the new member countries did not consider themselves silent partners in the new EU.

He told Euromoney then: "I strongly disagree with weakening the Maastricht criteria conditions, and with differing treatments for bigger and smaller countries. There's a great danger it will destroy the eurozone project."

When German chancellor Gerhard Schröder recently suggested that EU countries should harmonize their tax regimes, apparently so eastern European countries would not out-compete their western counterparts in attracting FDI, Miklos was having none of it.

"We've very openly rejected tax rate harmonization", he says. "Tax competition exists within the EU, but it is useful for speeding up necessary structural reforms in the whole of Europe."

All CEE countries have undergone years of demanding reforms, and so are much more open to change and liberal reform than such countries as France and Germany. The Anglo-Saxon model of free market capitalism thus has some new support within the EU.

Miklos says: "New Europe is already having a positive impact on reforms, but we need to do more. The question is, can the EU compete with the US and Asia? If we're serious about doing that, then we have to increase the competitiveness of the EU economy." Miklos adds that in many EU countries the labour market is not flexible enough, and the state is playing too big a role in the economy.

The EU policy that Miklos considers to be in greatest need of reform is the Common Agricultural Policy. "I think it really needs very deep changes," he says.

The government still faces some domestic challenges. Harmonization of VAT has led to some price rises, and unemployment remains high. Earlier this year, Slovakia's past returned to haunt it when Vladimir Meciar almost won the presidential elections.

Investors breathed a sigh of relief when Ivan Gasparovic was elected instead. Miklos is characteristically blunt, though. "Gasparovic was actually Meciar's closest ally for five years," he says. "I don't see such a big difference between the two, but he certainly can't be worse than the previous president, who opposed many reforms."

The government narrowly won the last elections, in 2002, after Meciar's party became divided. Miklos declared the new government should try to complete as many reforms as possible in the first two years in office. It is busy doing just that, undertaking reforms in healthcare, municipal finance and other areas.