Car production has been a boon to the Slovak economy for the past two decades but could become a liability as the country’s cost advantage erodes and automation proceeds. Slovakia needs sustained investment into human capital
The recent parliamentary elections in Slovakia were definitely not about “the economy, stupid.” High-profile corruption scandals under the watch of the left-populist Smer (Direction), in power for a better half of the past 15 years, the rise of neo-Nazis and divisive cultural questions dominated the campaign instead of bread and butter issues.
The emerging centre-right coalition, led by the maverick politician Igor Matovič, whose party went up from polling at around 8 per cent in December last year to winning the elections decisively with 25 per cent of the vote, promises clean governance as well as more direct democracy and radical transparency in government.
Nevertheless, economic matters are the most immediate stumbling block for the new government. With the fallout from the COVID-19 epidemic, characterized by the OECD as “the gravest threat since the financial crisis,” the economy will struggle to meet the 2.7 per cent growth rate projected by the IMF. With monetary policy in the hands of the European Central Bank, the new Slovak government will find itself with few tools at its disposal when adverse economic circumstances assert themselves.
Because of the country’s demographics, Slovakia’s public finances are in a more fragile shape than the headline indicators (a projected deficit of 0.9 per cent of GDP and a debt-to-GDP ratio of 47.8 per cent, according to the IMF) suggest.
Just days before the general elections, parliament passed a spending package, including pension hikes, which could balloon the deficit to 2.24 per cent this year and 3 per cent in 2021 according to the Fiscal Responsibility Board, the government’s official fiscal prudence watchdog.
Under the Eurozone’s rules, that leaves the new government very little fiscal space. Furthermore, one of the parties in the emerging coalition, We Are Family (Sme Rodina), has campaigned on the promise of building 25 thousand new rental housing units every year – equivalent to building a new city second only to Bratislava over the course of their four years in office.
The party has also vowed to circumvent the Eurozone’s fiscal rules by not including the debt incurred by state-owned companies into the calculation of public debt. Supposedly, that would accelerate public investment into highways and other infrastructure, currently held back by considerations of fiscal probity.
Not on the right path
Going ahead with such plans in the current environment means not only raising questions from Brussels but more importantly from investors. A spending spree, moreover, is not going to get Slovakia’s economy on the right path. Besides the chronic problems related to the rule of law, the country is now facing a Central European version of the middle-income trap.
Slovakia’s economy is organized largely around car production. With 202 cars produced each year per 1000 inhabitants, Slovakia is the largest car manufacturer in the world in per capita terms and the car industry accounts for half of the country’s total industrial output and some 47 per cent of all exports.
This has been a boon for Slovaks for the past two decades, yet is bound to become a liability as the country’s cost advantage erodes and automation proceeds. The OECD estimate that around 33 per cent of all jobs in Slovakia face the risk of being automated, the highest proportion in the OECD.
Poor long-term prospects
The prospects for long-term are poor even by standards of other Central European countries – which themselves have a serious competitiveness problem, as Martin Miszerak argued recently. On World Economic Forum’s Global Competitiveness Index, Slovakia lagged behind its neighbours on metrics of Research and Development, Innovation Capability. In terms of its government’s long-term vision for boosting competitiveness, Slovakia ranks 125th worldwide.
Neither has Slovakia seen much-sustained investment into human capital. Since its independence in 1993, Slovakia has seen sixteen different education ministers and as many reform proposals, without any follow-through. On the most recent edition of PISA tests, the country fared below OECD average – and below its three Visegrad neighbours – on reading, mathematics, and science.
No Slovak university has made it to the top 1000 of The Times Higher Education’s World University Rankings (though Comenius University is ranked between 801st and 900th place on the Shanghai ranking).
In short, while restoring trust in the government’s ability to provide justice is a necessary condition of Slovakia’s success, it is not a sufficient one. If the global economic outlook continues to deteriorate, one hopes that the new governing coalition will not resign itself to complacency or to the temptations of economic nationalism common elsewhere in the region.
As of now, however, the country is woefully unprepared for the economic shock that is about to hit it.