Presentation of the OECD Economic Survey of the Slovak Republic
by Angel Gurria, OECD Secretary-General
Bratislava, Slovakia, 5 April 2007
Good morning, ladies and gentlemen. It is a pleasure to be here with you today to present the OECD Economic Survey of the Slovak Republic. I would like to thank the State Secretary of the Ministry of Foreign Affairs, Mrs. Ol’ga Algayerová, for her kind invitation and warm welcome. I am pleased to report that the main message of the Survey is a very positive one: Slovakia will continue with strong economic expansion and stability provided that recent achievements are maintained and taken further, and that their benefits are shared equitably.
The Slovak Republic has become one of the strongest economic performers in Central Europe. Following major economic reforms, it is now enjoying remarkable economic growth. Spurred by major new automobile plants, GDP growth soared to 8.3% in 2006 and is expected to remain around this rate this year, before easing back to about 5 ¾ % in 2008. This growth has contributed to employment expansion, bringing down the number of people out of work.
More good news: the Slovak Republic appears on track to meet the conditions for entry to the euro area in January 2009. Consumer price inflation fell to 2% early this year, and may fall further. The 2007 budget is not likely to exceed 3% of GDP. Government debt was also well below the Maastricht ceiling in 2006 and interest and exchange rates are within the range of the Maastricht criteria. The overall picture indicates that Slovakia is a solid candidate to join the euro, which will be a major step forward for a country that is nearing its 15th birthday!
But pressing ahead with the discipline that has enabled Slovakia to achieve this impressive performance, and taking reforms further, will be crucial for sustainable and equitable growth. One of the main challenges is to ensure that the benefits of this expansion are widely distributed. I welcome the Government’s commitment to achieve a more equal distribution of income while, at the same time, not damaging the long-term growth prospects.
Carrying out this difficult task will require innovative and effective policies in four key areas: macroeconomic stability, employment, product markets, and above all, education.
Consolidating the macroeconomic stability
Joining the euro area will certainly have a positive impact on the Slovak economy, as it has for several smaller economies before it. It is likely to create a temporary boom, due to the lower interest rates that the euro will bring. But as we have seen in countries like Greece, Portugal or Spain, it will be necessary to maintain fiscal discipline to prevent the economy from overheating, and from damaging future growth prospects.
A key result of integrating the euro zone will be that Slovakia will no longer have the ability to rely on changes in the exchange rate to adjust to external shocks. Instead, adjustment to such shocks will have to take place directly through changes in prices and earnings. This underlines the need for Slovakia to continue with reforms to promote flexibility in the labour and product markets.
Let me say a few words about employment and labour markets. Recent progress is incontestable – domestic employment growth reached 2.3% in 2006, and with many Slovaks working abroad, national employment grew even more rapidly at 3.9%. But increasing employment rates and reducing unemployment are still key challenges. Slovakia’s overall employment rate remains low by international comparison, with rates being particularly low among older people and young women. Long-term unemployment remains stuck at about 10% of the labour force, and certain regions are more affected than others.
To fight long-term unemployment, we recommend avoiding further large increases in the minimum wage, as they could harm the employment prospects of low-skilled workers and fail to reduce income inequality. It is also important to improve active labour market policies, for example by expanding training measures for the young. To increase employment among older people, you will need to consider linking the retirement age to gains in life expectancy. For young women, an overly generous parental leave of three years is actually harming women’s career prospects. Shortening this leave and redirecting the funds towards childcare would considerably improve women’s employment perspectives. Finally, to keep your wages responsive to local conditions, you shouldn’t hesitate to exempt companies from legal extension of collective agreements if they request it.
Removing barriers to product market competition
Another area where progress needs to be made, if Slovakia is to excel, is in product markets. While general economic regulation promotes competition, barriers remain in a number of network industries, such as energy, telecommunications and railways. By opening these industries up to further competition, not only will you be able to raise the purchasing power of your citizens, but you will increase employment and productivity, and help your economy remain strong in the face of external shocks.
Improving education outcomes
Economic stability, employment and competition are all of critical importance, but the biggest challenge for the Slovak Republic is to make further progress in the field of education. Human capital is one of the main sources of competitive advantage in the era of globalisation, and Slovakia still has much to do.
Educational achievement among 15-year-olds in the Slovak Republic is below the OECD average, according to the OECD’s 2003 PISA study, particularly in reading. Outcomes are strongly influenced by socio-economic background, which means that poorer children are less likely to succeed in school. Roma children, mainly from disadvantaged backgrounds and representing a growing share of children, fare particularly poorly.
International evidence suggests that early childhood education has a significant effect on learning abilities in subsequent stages. Because of this, I applaud the government’s initiative to make kindergarten free of charge for five year olds from 2008. But it will be critical to ensure that implementation of this initiative is effective and reaches all children.
Raising teacher quality would also improve achievement. The government has increased salaries from very low levels to attract better quality candidates, but much remains to be done, including upgrading of teachers’ skills and ensuring that highly qualified teachers are brought to schools where they are needed most. Like I said, human capital is a key ingredient for success in the world of tomorrow, so I would invite you to look closely at all of our recommendations, including those on vocational and tertiary education.
The Slovak Republic can be proud of its achievements, which have put you on the path to joining the euro and to taking your place in the global economy. But progress must continue if you are to catch up with the standard of living of your fellow Europeans. The OECD stands ready not only to discuss the necessary policies but also to assist the Government of the Slovak Republic in its dialogue with stakeholders and the public, and help explain the need to move forward with these reforms.
I have not had time to cover all the interesting points in the survey, and I am fortunate to be accompanied by several experts. We look forward to your questions.