After the Velvet revolution in 1989, Slovakia – as a part of former Czechoslovakia – embarked upon the road to building a new socio-economic system based on market principles and liberal democracy. A thorough transformation of its economy was needed as the country significantly lagged behind the developed West in its income level. The growth of the centrally planned economy ran out of the steam as various inefficiencies and a lack of innovative vibrancy were brought to the fore leading to relatively low labor productivity achieved by the end 1980’s (compared to the West). Initial reforms orchestrated and pushed from Prague in the area of liberalization, privatization, and stabilization led to a quick transformation of the centrally planned economy into the one run by market principles (if a bit imperfectly). Later reforms focused on institutions building – to a large extent driven by institutional harmonization in the run-up to the EU membership – further strengthened the economic capacity of the country, led to a reduction of Slovakia’s country risk, the inflow of FDI and other foreign capital, and later an economic takeoff in the second half of the 2000’s.
Over the last three decades, the country has traveled a long and thorny path but the result is one of substantial economic convergence. In order to illustrate: in 2019, the income per capita in Slovakia recalculated to take account of differing prices across borders (PPS) reached 72 % of the EU28 level while in 1993’s the figure was below 40%. Even more staggering picture is provided by a look at created GDP in current prices expressed in foreign currency. While in 1993, the GDP of Slovakia – i.e. the market value of all goods and services produced on the territory of the country -reached about 337 billion of SKK ( less than 10 bn EUR). (1) Since 1993, the yearly created GDP has thus increased nearly tenfold to 94 billion EUR in 2019! This is a remarkable scale of the economic expansion in Slovakia (even if expressed in nominal figures) and was driven by three factors a) relatively high real GDP growth; b) extra inflation driven by price convergence; c) a substantial nominal currency appreciation of SKK vis-a-vis EUR. Obviously, this does not mean that the level of well being of an average person has increased to the same extent as this is a figure expressed in nominal terms but it says something about the size of the economy and how Slovakia progressed economicly over the last nearly three decades.
Structurally, the high GDP growth was driven mostly by the industrial sector – for instance during the high growth decade of 2001-2010 nearly half of the addition to the growth of value-added created by the economy was due to the manufacturing sector (2). Car and electronics sectors were leading sectors with double-digit yearly growth rates recorded in that decade in both cases. Technologically, the decade of 2000’a also saw a substantial upgrade of production when by the end of that decade nearly 40% of the manufacturing sector’s production was of high- medium-high tech variety- this means that the share nearly doubled over the 10 years.
In the past decade (2010-2019) the convergence tempo has subsided and the end of it has brought substantial challenges. Industrial Revolution 4.0, to borrow the name from the WEF parlance, brings an enormous amount of innovations to the market and means that structural changes are inevitable for the Slovak economy to remain competitive. The upcoming robotization and automatization will bring disruption to the marketplace and several leading manufacturing sectors will likely need to streamline their operations in terms of the employed labor. Value-ladder augmentation of the car/engineering cluster towards higher value-added activities will probably be necessary for the cluster to keep its relative importance. Manufacturing start-ups tapping into an expected pool of labor made available by the upcoming AI revolution (and resulting labor redundancies) would be highly needed but their proliferation of any significance will represent a substantial challenge.
Services sectors will not remain immune to the AI revolution and shared and other services will have to adjust. However, in the author’s view, it is the sector of sophisticated high value-added exportable services – be that IT sector, sophisticated professional, consulting, and high-end tourism services – perhaps focusing on the eastern markets (such as China) that could be the source of future dynamism of the Slovak economy (3). These services derive their value mostly from human talent – hence an urgent need to bolster the human-capital formation sector perhaps also tapping into the announced massive EU sponsored aid so that these services spring up even more widely in a foreseeable time horizon.
In a nutshell, Slovakia in the next decade will probably need to focus more on domestic sources of growth to complement the FDIs as those will be harder to get. Improvements in the area of the business environment, strong support of the domestic start-up scene and of human capital formation together with further institutional improvements leading to lower country risk will be the key to improve the competitiveness of the Slovak economy. Seen in this light, the recent batch of reforms in the area of business environment adopted by the government is a welcome step in a positive direction. Same importantly, data-driven and sophisticated country growth strategy adopted by the local policymakers would be a highly needed yardstick to project pro-growth policies in a multiyear horizon.
Vladimir Zlacky
LookingEast.eu
1) Slovenska ekonomika 1990-1993; Akademicky project FM UK, Vladimir Zlacky, Lubos Pastor, Jan Toth
2) Slovak Growth Story: All about Manufacturing, UniCredit report, 2012, published on LookingEast.eu – DOWNLOAD
3) On an anecdotal note, even as specialized service as tennis academies ( that bring foreign kids in for practice), commercial fairs companies, or high-end marketing or interior design studios which undertake projects outside of the country could be examples of such high-value added services.