Few countries have managed a transformation as impressive and fast as that of Slovakia. In 1998 the country was an economic basket case, riddled with corruption and lagging far behind its eastern bloc neighbours in the race for European integration.
Within seven years it was a member of the European Union, on track for eurozone accession and posting GDP growth in double digits.
One of the leading forces behind this remarkable turnaround was Ivan Miklos, a young economist-turned-politician.
Miklos’s credentials as a reformer date back to the earliest days of post-communist transition when, as a 29-year-old academic and pro-democracy campaigner, he was drafted into the government of Czechoslovakia immediately after the fall of the Berlin Wall.
Two years later he was appointed minister of privatization to oversee the first sales of state assets in Czechoslovakia. For smaller firms this was done via auctions, while larger companies were privatized using voucher schemes.
The latter proved controversial, but Miklos argues this was not entirely the fault of the system.
“The problem was the lack of local capital markets and protection for minority shareholders,” he says.
He also notes that the task of finding reputable investors for Czechoslovak state-owned firms was complicated by local mistrust of inward investment.
“From the beginning, people were afraid of foreign ownership,” he says. “They thought that foreigners would buy everything and we would end up just as servants to them.”
Unfortunately for the Slovak economy, these nationalist tendencies quickly spilled over into politics, resulting in the election of Vladimir Meciar’s Movement for a Democratic Slovakia in 1992 and in Slovakia’s split from the Czech Republic the following year.
For the next five years Meciar pursued a disastrous policy of economic isolationism. By 1998 the other Visegrad countries – Hungary, Poland and Czech Republic – were members of both the OECD and Nato, and on the path to EU accession. Slovakia had missed out on all three.
We were all unified in our goal of catching up with our neighbours- Ivan Miklos
Miklos says the fear of falling behind on European integration was the main reason for the electoral success of Mikulas Dzurinda’s grand coalition, which came to power in October 1998.
“Not only the government but also most of the population felt this was a real threat for our country,” he says. “We were all unified in the goal of catching up with our neighbours.”
The first task for the new government was to restore macroeconomic stability. This involved not only sorting out Slovakia’s budget and balance of payments but also its corrupt and mismanaged state-owned companies.
As minister of economy, Miklos played a key role in the latter process, including the restructuring of the state banking sector, which cost 12% of Slovakia’s GDP. By the time Dzurinda’s coalition won a second term in 2002, the initial stabilization had been completed and the government was able to embark on more radical financial and structural reforms.
Under Miklos’s leadership, the finance ministry pushed through fiscal decentralization, the introduction of a flat tax for corporates and individuals, and drastic cuts to public spending. These were accompanied by an overhaul of Slovakia’s pension, healthcare and welfare systems, also coordinated by Miklos.
“What was important was the comprehensive character of the whole package,” he says. “This really changed the situation.”
The results were indeed dramatic. Foreign direct investment began to pour into Slovakia and, after the country joined the EU in 2004, economic growth accelerated sharply. By 2007 it had reached an astonishing 10.5%.
Slovakia’s sovereign credit rating also shot up.
“In 2000, we were three levels behind Poland and four behind the Czech Republic and Hungary,” says Miklos. “By 2005, we had passed all three of them. That shows how quick change was as a result of this radical comprehensive and complex package of reforms.”
The success of Slovakia’s reform programme also meant that, by 2005, the country was able to meet the Maastricht criteria and enter the European Exchange Rate Mechanism. The following summer, however, the prospect of euro entry was put at risk when parliamentary elections were once again won by a populist, Robert Fico, who campaigned on an anti-reform platform.
Suggestions that the new government might withdraw Slovakia’s eurozone application, however, caused such a sharp drop in the currency that Fico panicked and promised to continue with the process. Slovakia duly joined the eurozone in 2009.
“Thanks to the euro, the reforms we had undertaken were protected during Fico’s first term in government,” says Miklos, who says strong leadership is the key to reform.