Socio-Economic Transformation of Slovakia since its Independence

How far were Vladimír Mečiar’s policies successful in attracting foreign investments into Slovakia?


Diploma Thesis, 2006
130 Pages, Grade: 2

Excerpt

Table of Content

Abstract

1. Preface

2. Slovakia under Prime Minister Vladimír Mečiar from 1992 – 1998
2.1. Historical overview of Slovakia
2.2. The economic situation and the social consequences for Slovakia after its separation from Czechoslovakia in 1993
2.3. Aims
2.4. Results of Mečiar’s policies and reforms
2.5. Consequences for Slovakia
2.5.1. Economic situation
2.5.2. Intercultural problems
2.5.3. International Relations
2.6. European Union (EU) – reservations
2.7. The Fall of Mečiar and preliminary EU-Slovakia accession talks

3. Foreign direct investments (FDI) in Eastern Europe
3.1. General Facts on Foreign Investments
3.2. Reasons for Investments
3.3. Motives for Austrian enterprises to make FDI in the CEE
3.4. FDI by Economic Sector
3.5. Countries attracting major foreign investments
3.5.1. Foreign direct investments in Hungary
3.5.2. Foreign direct investments in Slovenia
3.5.3. Foreign direct investments in the Czech Republic
3.5.4. Foreign direct investments in Slovakia

4. FDI in Slovakia from 1993 up to the start of the post Mečiar Era
4.1. Macroeconomic data
4.1.1. GDP Growth
4.1.2. Annual inflation rate
4.1.3. Unemployment rate
4.1.4. Foreign exchange reserves
4.1.4.1. Foreign exchange reserves of the National Bank
4.1.4.2. Total foreign exchange reserves
4.1.5. National budget balance
4.1.6. Foreign trade balance
4.1.6.1. Foreign trade partners
4.1.7. Foreign direct investment
4.1.8. Summary of macroeconomic data
4.2. Volume of foreign investment
4.3. Distribution of FDI by countries
4.3.1. FDI distribution in 1996
4.3.2. FDI distribution in 1997
4.3.3. FDI distribution in 1998
4.3.4. FDI distribution in 1999
4.3.5. FDI distribution in 2000
4.3.6. FDI by countries from 1996 – 2000 in SKK million.
4.3.7. Summary of Distribution of FDI by country from 1996 to 2000
4.4. Distribution of FDI by sectors
4.4.1. FDI distributed by sector in 1998
4.4.2. FDI distributed by sector in 1999
4.4.3. FDI distributed by sector in 2000
4.4.4. Summary distribution of FDI by sector
4.5. Distribution of FDI by regions
4.5.1. FDI distributed by region in 1999
4.5.2. FDI distributed by region in 2000
4.5.3. FDI distributed by regions from 1999 – 2000 in SKK million
4.5.4. FDI distributed by regions in percent to the total from 1999 – 2000
4.5.5. Summary of FDI by regions
4.6. Problems faced by foreign investors
4.7. Summary

5. Conclusion

Bibliography

Appendix

Tables:

Table 1 Direktinvestitionen in den Ländern Ost- und Mitteleuropas, 1997 - 2000

Table 2 Motive für die Auslandsbeteiligung: Erhebung 1999

Table 3 Verteilung der Neuinvestitionen Österreichs in Mittel- und Osteuropa, 2002

Table 4 Austrian market share in Eastern Europe: stocks

Table 5 Market driven factors

Table 6 FDI inward stock by main activities, per cent

Table 7 Foreign direct investments in Hungary

Table 8 Foreign direct investments in Slovenia

Table 9 Foreign direct investments in the Czech Republic

Table 10 Foreign direct investments in Slovakia

Table 11 Macroeconomic data

Table 12 GDP growth in percent

Table 13 Annual inflation rate in percent

Table 14 Unemployment rate in percent

Table 15 Foreign exchange reserves of the National Bank in USD million

Table 16 Total foreign exchange reserves in USD million

Table 17 Natioal budget balance in USD million

Table 18 Foreign trade balance in USD million

Table 19 Leading foreign trade partners (1998)

Table 20 Foreign direct investment in USD million

Table 21 Summary of macroeconomic data in percent

Table 22 Summary of macroeconomic data in USD million

Table 23 Volume of foreign investment

Table 24 Distribution of FDI by countries in SKK million

Table 25 Distribution of FDI by country in SKK million in 1996

Table 26 Distribution of FDI by country in SKK million in 1997

Table 27 Distribution of FDI by country in SKK million in 1998

Table 28 Distribution of FDI by country in SKK million in 1999

Table 29 Distribution of FDI by country in SKK million in 2000

Table 30 Distribution of FDI by countries from 1996 – 2000 in SKK million

Table 31 Major investing countries from 1996 - 2000

Table 32 Distribution of FDI by sectors as of 31.12.2000

Table 33 Distribution of FDI by sector in 1998

Table 34 Distribution of FDI by sector in 1999

Table 35 Distribution of FDI by sector in 2000

Table 36 Distribution by region as of 31.12.2000

Table 37 Distribution of FDI by region in 1999

Table 38 Distribution of FDI by region in 2000

Table 39 Distribution of FDI by regions from 1999 – 2000 in SKK million

Table 40 Distribution of FDI by regions in percent to the total from 1999 – 2000

Abstract

This thesis analyses the socio-economic and political transformation processes of Slovakia since its separation from Czechoslovakia. The main question to be answered is how successful Prime Minister Vladimír Mečiar’s policies were in attracting FDI into Slovakia.

After the Velvet Revolution in 1989, Czechoslovakia started to initiate fundamental democratic measures concerning the public administration in the country. Two interconnected reforms took place in 1990: decentralization and the civil service reform. In 1992 a new government was voted into office under the leadership of Prime Minister Vladimír Mečiar from the HZDS party.

On 1 January 1993 Slovakia became independent by non-violent means from the Czech Republic, with Bratislava as its capital. For a country, which did not have economic wealth as high as the Czech Republic and an increasing unemployment rate, the total change of their whole economy meant that much time was spent on the question of how to finance the state.

In terms of economic changes, the Prime Minister wanted to create a strong entrepreneurial Slovakian class that would be able to control the economy. But his privatization policies led to financial difficulties for the Slovakian state, its economy and its people. Although there was co-operation with Russia, the unemployment rate in Slovakia remained at 16.2% percent at the end of 1998. Constant discriminations in Slovakia and the fact that Mečiar excluded the opposition parties completely from parliamentary control organs, the Slovakian Secret Service (SIS), the media and the process of privatization, caused international protests against Mečiar and his regime. This caused the EU to warn Slovakia that it would no longer receive assistance, if the government continued to misuse its power.

FDI have steadily grown in the CEE since 1997. The reasons for this increase of FDI were the fall of communism, the decrease in political risks, the attempt of the CEE to fulfil the criteria to become EU members, and the cheaper workforce of the CEE. Austria played a major role in new FDI in the CEE. In Slovakia this amounted to 7% by the end of 2002, which was only three years after its new Prime Minister Nikolas Dzurinda had been voted in.

During Mečiar’s leadership, Hungarian investors were not seen in Slovakia, but with the new Dzurinda government they started to increase their investment volume drastically. The three main sectors, which attracted most of the FDI in Slovakia were: industrial production, banking and insurance, and wholesale and retail trade. The two main regions in 2000 with FDI in-inflow were the Bratislava region and the Košicke region. The years before, only the Bratislava region experienced major FDI in-flow. In all the regions the total volume of FDI in Slovakian Kronar (SKK) increased between 1999 and 2000, but the percentage of the total FDI inflow changed differently in some regions. The major problems for foreign investors were bureucracy and corruption, a lack of political and economic stability, and the lack of industrial infrastructure.

1. Preface

This thesis analyses the transformation process of Slovakia since its separation from Czechoslovakia. The main question to be answered is how successful Prime Minister Vladimír Mečiar’s policies were in attracting FDI into Slovakia.

Due to the fact that Slovakia was not as economically rich as its Czech counterpart it would have been essential for the Slovak economy to attract foreign investors in order to improve its economic situation. That is why Prime Minister Vladimír Mečiar’s policies are being examined closely to determine the extent of its success in attracting investments into the Slovak economy.

The implementation and his reform policies led to international conflicts and some intercultural problems. The reasons for these conflicts shall be examined.

In addition to finding out how far Mečiar’s policies succeeded in helping his country avoid economic setbacks the thesis will examine the main foreign sources of investments.

The first part will show how the development of Slovakia under Mečiar affected the economy, his stated aims, how he implemented them and the consequences of his policies. The examinations also include EU reservations. The post Mečiar era and the start of preliminary talks with the EU closes this chapter.

The second part focuses on foreign investments in Europe, with an overview of foreign investments in Slovakia.

The third part deals with foreign investments in Slovakia, the “reasons” that led countries to invest in Slovakia, and some of the problems that occurred.

2. Slovakia under Prime Minister Vladimír Mečiar from 1992 – 1998

2.1. Historical overview of Slovakia

After the Velvet Revolution in 1989, Czechoslovakia started to initiate fundamental democratic measures concerning the public administration in the country. Two interconnected reforms took place in 1990: the decentralization and the civil service reform. The first initiative was made to turn the state administration into a territorial self-government. The second was meant to define the new status of civil servants.

During 1992, in the Slovak half of the country, a new government was voted in which consisted of a coalition of populist parties with strong nationalistic character and some authoritarian structures. The leader of this government was Vladimír Mečiar, the head of the Movement for a Democratic Slovakia (HZDS) party.[1]

On 1 January 1993 Slovakia became independent from the Czech Republic, with Bratislava as its capital. Its new constitution comprised 156 Articles and set out the separation of powers between the executive, judiciary and legislature. Also, basic rights were guaranteed to its 5,4 million inhabitants.[2]

The constitution had already been ratified on 1 September 1992 and went into force two days later. The separation process in itself went smoothly by non-violent means, without the population of former Czechoslovakia being asked in any referendum whether they wanted the split or not.[3]

Politcs played a key role in the break-up. It continued to influence subsequent events that had both political and economic consequences. Neither the Czech side led by Vaclav Havel, nor the Slovak side, which was governed by Prime Minister Mečiar, found any common solutions to govern the country together. Being men of strong ambitions, both agreed on separating it into two different states in order to keep control over their respective territories.

The separation was a chance for the Slovaks to have their own state, which they never had before, except for a short time during WWII. That was the time when Slovakia was very dependant on the Third Reich, but for over 1000 years Slovaks lived under Magyar influence and later on as part of the Austro- Hungarian monarchy.

Separation was such a strong and tempting political argument that most Slovaks were gladly looking forward to going their own way even though they knew hard times were approaching them in the initial stages of creating their own separate state.[4]

When Czechoslovakia still existed, the production of goods such as the steel industry was situated in Slovakia and the car industry and special machine building industry were mainly located in the Czech part of the country. This meant also that the profits remained in the Czech part of Czechoslovakia strengthening the economic power and political decisions in the Czech half of the country, although the leading politicians, such as the communist president, Gustaf Hussak, were Slovaks.[5]

2.2. The economic situation and the social consequences for Slovakia after its separation from Czechoslovakia in 1993

Slovakia was very disadvantaged after the separation, because it had to rebuild its total political infrastructure and institutions, on the one hand, and change its economic situation, as well.[6]

This was something the Czech Republic did not have to do, because it could rely on its old institutions and the strength of its economy. For a country, which did not have profits as high as the Czech Republic, the total change of its whole economy meant that Slovakia had to spend much time on the question of how to finance the state.[7]

One aspect that later caused Slovakia tremendous problems was, the decision before the separation by Vaclav Havel to close the arms industry in the north east of Slovakia. Some of these factories had to find ways of creating new programs. In many of these places the people were facing serious social difficulties due to the loss of jobs. Alltogether, about 100,000 people were dismissed of work. in the arms industry.[8] Unfortunately, finding new jobs for such an amount of workforce was not possible. Considering that the country had an unemployment rate of over 12% in 1993, these closings led to an increase of 1.5% of unemployment.

It was also a drastic social change for the people especially when taking into consideration that most of the employees were still used to the communist system, which practically meant that everyone had a secure job and a certain amount to finance the basics of living.

Something had to be done and the new Slovakian government led by Prime Minister Mečiar had to find solutions to make the weak Slovakian economy stronger.

2.3. Aims

When Prime Minister Mečiar came to power for the first time, his party formed a coalition with the Slovakian Labour Party and the Nationalistic Party of Slovakia. With the Slovakian Labour Party being oriented on the left side of the political spectrum and the Nationalistic Party on the far right side, Mr. Mečiar’s political orientation was considered to have been somewhere in the middle of the political spectrum, with certain nationalistic tendencies.[9]

In terms of economic changes the Prime Minister wanted to create a strong entrepreneurial Slovakian class that would be able to control the economy. This was his main aim, but in reality it was impossible to have strong economic power, because Slovakia was a poor undercapitalized country that was lagging behind in terms of new investments, technological improvements, and integration in the western economic system. Therefore foreign aid in terms of foreign investments would have been needed to improve the economic situation of the country.[10]

Considering the Prime Minister’s main aim, it had to be taken into consideration that Slovakia was a poor country and somehow measures had to be taken in order to ensure the sound fiscal policies of the country. His political program included the integration of Slovakia’s economy into the European Economic Area (EEA), but this was not compatible with his aim of creating a strong Slovakian entrepreneurial class.[11]

2.4. Results of Mečiar’s policies and reforms

When it came to public administration, the only reform implemented from 1994 to 1998 in the public sector was a new territorial division that led to a slow process of decentralization. Laws to regulate the duties of civil servants were not introduced during Mečiar`s time. This led to politicization of the civil service and ethical principles were seen as lacking, which resulted in a high turnover among civil servants.[12]

To finance the restructuring of the economy and to fulfill his aim of a strong entrepreneurial Slovakian class, Prime Minister Mečiar decided to sell the most lucrative state-owned enterprises below market value, to his friends and political supporters. He reportedly helped them to get loans from banks by using his own political influence.[13]

This was the way Prime Minister Mečiar used to finance the state and to support his vision of a strong entrepreneurial Slovakian class. In the first year of independance the government was faced with a challenge of balancing its budget. It may happen that governmental-owned enterprises will have to be sold to ensure that the implemented political system can be financed and that both the state and the employees of the enterprises will profit from the deal.

Through Mr. Mečiar’s way only a minor return on investment was achieved and the people who took over some of the most lucrative state enterprises, could practically do with them whatever they wanted without any governmental interference. It did not take a long time to see that Mečiar’s decision to privatize these enterprises, for the benefit of his friends and his politics in general, led to financial difficulties for the Slovakian state, its economy and its people.

2.5. Consequences for Slovakia

Mečiar’s way of governing the country had diverse consequences for Slovakia. These consequences, which effected the economic situation of the country, intercultural problems within Slovakia, and international relations, shall be examined in this chapter.

2.5.1. Economic situation

On 4 October 1993 the Slovak Republic signed an association treaty with the EU in order to get access to the European market. Its Prime Minister stated that the most effective way for Slovakia, which was undergoing a transformation process was to gain access to the markets of the European Union.[14] The speech was quite contradictory to what the Prime Minister said a few months later, when he stated:

“If they don’t want us in the west, we shall turn east.”[15]

The speeches were contradictory, because at that time Russia was still a communist country and the EU could not accept a future member country with an economy that was dependant on a communist country. The EU had the desire to bring post communist countries under EU influence, but not under these conditions.

The fact that between 30 to 40% of the Slovakian economy was still under major Russian influence explains why the Prime Minister spoke in contradictory terms. Ninety-four percent of the imported gas and 80% of the oil came from Russia in 1993.[16] The bonds between Russia and Slovakia were much stronger than the bonds between the other post communist countries and its former controller.

In 1991 when Mečiar was Prime Minister of the Slovakian part of Czechoslovakia, he signed an economic agreement with Russia to manufacture weapons under Russian license in Slovakia.[17]

The above mentioned reasons could account for Prime Minister Mečiar`s desire to cooperate more with the East than the West and influenced his foreign policy.[18]

Although there was co-operation with Russia, the unemployment rate in Slovakia was still 16.2% at the end of 1998. However, the unemployment rate worsened steadily with the beginning of the economic transformation of the country in 1990.[19] The privatization process of the Prime Minister strengthened economic and political clientelism and created a breeding ground for corruption.[20] Therefore corruption had to be combated as a priority by the new government in order to guarantee a democratic process.

2.5.2. Intercultural problems

Mečiar and his party were not very friendly towards minorities. During the time of his premiership many changes were made which were disappointing and discriminating for the Hungarian and Roma populations of Slovakia. For example, in 1992 the government in Bratislava started to change local Hungarian signs into Slovakian, indicating two languages in the parts of the Slovak Republic with a majority of Hungarians.[21]

The government also ordered that newborn Hungarians with a Hungarian first name had to be registered, not in the original Hungarian language, but in Slovak with their first name.[22] That was only the beginning of Mečiar’s oppressive politics towards the Hungarian minority. He implemented more discriminating changes that affected the Hungarian population, such as that only ethnic Slovaks were allowed to teach the Slovakian language, history and geography. Mečiar granted an increase of salaries to Slovakian teachers working in Hungarian dominated parts of Slovakia. Later, teachers were not allowed to hand out certificates to students in both languages anymore. Those teachers who ignored this rule were punished.[23]

Nevertheless, the change in the school system was not the only crucial act of change for the Hungarian speaking population in Slovakia. Another was the policy to decrease the governance of the Hungarian speaking Slovakians in their territories in such a way that they were not able to reach more than 30% in any district. Komárno and Dunajska Streda, two districts with a majority of Hungarian speaking Slovakians, were split up and joined with other districts in order to guarantee a Slovakian speaking majority.[24]

Another group of minorities that was singled out for discriminatory treatment was the Roma. By 1998 hundreds of Roma wanted to leave the country and applied to settle down in the United Kingdom and Sweden.

Their main reason for applying was to escape constant racist discrimination in their country. Due to the fact that Slovakia wanted to join the EU, the country was forced by the EU to rethink its official policies toward the Roma population. During the communist era the Roma were not really mentioned and excluded from official politics and integration. They lived and still live outside the towns and few cared about sanitary conditions, schooling, or providing basic infrastructure for them. The estimated number of Roma in Slovakia is about 500,000 people currently, which accounts for about 8% of the population.

The estimated number of Roma varies in literature, because in the Roma dominated parts of the country a proper official census does not exist. Nevertheless it was assumed by some authors that by the year 2060 the majority of the Slovakian population will be dominated by Roma and therefore something should be done to integrate them in the Slovakian society. The Roma themselves wanted to be accepted as a minority and to be represented in parliament. However it seemed that only minor changes were made to integrate the Roma at the time when Vladimír Mečiar was in power and only with immense EU pressure, which almost led to an exclusion of Slovakia from preliminary talks to join the EU.[25]

While mentioning the past, it should not be overlooked that even the present government is not doing much to integrate the Roma population, although Slovakia is already a member state of the EU. It seems that the Roma are not able to organize themselves politically, or certain measures were taken that prevents them from organizing properly in Slovakia.[26]

Not even a working group of the EU, which is responsible for issues concerning the Roma was able to change the fact that the Roma are still not integrated in the Slovak population.

2.5.3. International Relations

The constant discriminations in Slovakia and the fact that Mečiar excluded the opposition parties completely from parliamentary control organs, the Slovakian Secret Service (SIS), the media and the process of privatization, caused international protests against Mečiar and his regime.[27]

Shortly after taking control of the Slovakian Secret Service, Mečiar’s regime started to use it against his political opponents and the SIS started to become involved in illegal actions.[28] This part of Mečiar’s politics could be described as the Pre–Demarche–Era according to the Slovakian politologist, Alexander Duleba.[29]

The phases of the HZDS-SNS-ZRS- coalition from 1994 – 1998 can be divided into three Demarche eras, which were named after the EU-Demarches that were used at the different stages against the coalition. The phases of the coalition can be divided into:[30]

Pre–Demarche–Era: up to November 1994

Demarche–Era: November 1994 – October 1995

Post–Demarche–Era: October 1995 – October 1998

The constant abuse of power and on-going discriminations against the minorities, caused the EU to take action. In a statement issued in October 1995, the EU said:

“If the gouvernment (sic) of the Slovak Republic continues the policy which does not comply with the elementary principles of democracy, human rights and minority rights as well as rule of law, the EU will have to consider its programme of assistance and co-operation within the Europe Agreement, which will have be suspended (sic).”[31]

This statement, which ushered in the Demarche Era of EU-Slovak relations, clearly shows that the EU was not in favor of the way the Slovakian Prime Minister governed his country and wanted the misuse of power to stop. Therefore further political and economic co-operation and aid from the EU were in grave danger of being withdrawn from the Slovak Republic.

An unusual and significant event occured during the Demarche Era of the coalition, involving the kidnapping of the son of the Slovakian President Kovacs. The victim was brought to Austria at a time when Mečiar was acting as deputy president, because his legislation period had been longer than the period of the president. In what was a closely watched development, Mečiar decided to grant an amnesty to the people involved in the kidnapping, although their identities had not been uncovered and charges had been brought against them[32]

Official proof of Mr. Mečiar’s involvement in the kidnapping of the son of the Slovakian President cannot be found in the literature, but it seemed very strange that amnesties were granted to the people believed to have been involved in the kidnapping. Therefore one could assume that either the Prime Minister himself had known of the kidnapping, or the people involved in the process had approached him to grant the amnesty.

The kidnapping incident and the amnesty that was granted shortly afterwards could have been one reason for the EU to become very suspicious of the way politics was done in Slovakia.

It neither improved Mr. Mečiar’s image as a Prime Minister, nor brought the necessary EU aid and investments to Slovakia.

During the last phase of the coalition, the Post–Demarche Era, Mečiar was able to get more power for a short period, because the candidate for President failed to obtain a three-fifth majority of votes in the parliament.

To break the stalemate, a referendum was put to the people that should have changed the indirect vote for the President of Slovakia to a direct vote.[33] It should have also included questions concerning the planned integration of Slovakia into NATO and therefore been a referendum on two questions. However, the question of presidential votes did not appear on the ballot. The Minister of Internal Affairs issued the ballots papers with the questions concerning NATO only, which consisted of the following questions:[34]

Are you for joining the NATO?

Are you for having atomic weapons in the Slovak Republic?

Are you for military bases in the Slovak Republic?

After the term of office of President Kovacs ended in March 1998, Slovakia did not have a new president and Mr. Mečiar was made Deputy President, because the parliamentarians were not able to agree on any of the candidates.[35] This stalemate provided an advantage for Mr. Mečiar as it helped him to gain more personal power during his period.

When Mr. Mečiar became more powerful he wanted to pass a law to punish journalists and media owners who would not print or broadcast the truth about Slovakia as the government saw it.

Finally, after the Slovakian government had been shown by the International Media Fund that this would have violated the Slovak constitution and a number of international conventions signed by the Slovak government, this law did not come into existence and an international NGO helped to ensure democracy concerning the Slovak press.[36]

The international non-profit organisation that helped was called ProMedia, which was part of the International Media Fund that had come into existence in 1990. Pro Media analysed the law Mečiar wanted to pass and proved that it would violate the Slovak constitution and international conventions signed by the Slovak government. As a result the government had to withdraw the law.[37]

2.6. European Union (EU) – reservations

Strictly speaking, the EU`s judgment of Slovakia was a very negative one.[38] It was not a question whether Slovakia wanted to be a member of the EU or not, but rather if the EU wanted Slovakia to become a member state and, if not, who could be made responsible for that.

Money was needed for the Slovak economy, but it seemed that the Slovak HZDS government had other plans, which were more based on how to democratize the country, while concentrating on Slovakia’s domestic issues. From the HZDS’strategy, priority was never given to joining the EU.[39]

Although the HZDS was in favor of the current situation, development and integration of the EU, it was not willing to put domestic concern aside in order to give priority to EU requirements.[40] Slovakia was excluded from the first CEE group to join the EU Union at the Luxembourg European Council in 1997, because it had failed to meet the political criterion which had been laid down at the 1993 Copenhagen European Council. This was due to the fact that it was lagging behind democratic stability of institutions that should have guaranteed democracy, the rule of law, human rights and respect for minorities and their protection.[41]

In 1999 the EU put pressure to implement a law for minorities to use their own language in Slovakia.[42] In 1998 the EU played a major role in the formation of a broad-based government.[43] As a matter of fact, the EU did not directly interfere in the Slovakian process of democratization, but it created the framework for the changes.[44] However the situation relaxed after the votes in 2002, when the return of Mečiar’s party to the government became very unlikely and EU concern towards integrating Slovakia changed to the positive for the country.

Therefore the discussion on whether the EU wanted Slovakia to become a member state changed to how much each Slovakian party wanted to get from the EU in case their country became a member state.[45] Though the major Slovak parties were not blindly supporting EU membership for their country, an accession to the EU could not be hindered any longer.[46] Most Slovak parties did not only want to join the EU, but also participate in the EU`s major changes and it mattered for them what kind of EU they were joining.[47]

2.7. The Fall of Mečiar and preliminary EU-Slovakia accession talks

In 1998 Slovakia was able to vote for the fourth time after the fall of communism in former Czechoslovakia and the rest of Soviet controlled Eastern Europe. In order to ensure that democratic principles were being kept, the OSCE, the EU, the European Council and the US State Department decided to send observers to Slovakia to report on the democratic process.[48]

At the final count of votes, Mečiar’s HZDS reached 27% and 43 mandates, the SDK 26.33% and 42 mandates, SDL’ reached 14.66% and 23 mandates, SMK 9.12% and 15 mandates, SOP 8.01% and 13 mandates, and the SNS received 9.07% of the vote and got 14 mandates.[49]

Although Mečiar’s party was again able to reach 27% due to his charismatic personality, this time it did not help him to find a coalition partner. Instead, Mikulas Dzurindas’ SDK formed a coalition with the SDL’, the SOP and the SMK to govern the country.[50] Mikulas Dzurindas and his SDK managed to attain what the former prime minister was not able to reach, the start of preliminary talks with the EU and later on the integration of Slovakia as a full member in the EU. That was done within a very short period of time.[51]

The new Prime Minister introduced numerous changes in Slovakia. The major changes of the new government were on the one hand, the integration of Slovakia in the European Union and, on the other hand, the implementation of a 19% flat tax in order to strengthen Slovakia’s economy.

The flat tax, the low wage costs, which amounted to about one third of the Austrian wage costs, and the stabilization of the legislative, created a very attractive environment for companies to invest in Slovakia. However, not as many foreign investors flocked to Slovakia as the Slovakian government would have liked. Foreign investors, especially from neighboring Austria, were showing doubts about investing in Slovakia.

Major investments, however were achieved within the car industry, along with investments in the banking sector (mainly by Austrians) in comparison to the Mečiar Era.

The biggest investment during Prime Minister Dzurinda's period was with FIAT. The Korean owners of FIAT had already started to construct cars in the North East of Slovakia and their plans were to build 300,000 cars by 2007. Also, Citroen has started to produce cars in Trnava, which is situated about 40 km of Bratislava. By the year 2007, Slovakia planned to be the biggest producer of cars worldwide/per inhabitant.[52]

However, the Slovakian population did not seem to be very satisfied with the new Prime Minister.[53] Many people did not favor the 19% flat tax, because it gave an advantage to enterprises and the rich, whereas the poor people had to pay 19% as well, resulting in a broadening of the gap between the rich and the poor.

Only the future will show, whether the Slovak Republic will be able to undergo the necessary changes to attain prosperity that would be comparable to Western Europe.

3. Foreign direct investments (FDI) in Eastern Europe

Before going into details with FDI in Slovakia it is necessary to give an overview of some general facts, and to analyse reasons and motives of investments in the CEE.

3.1. General Facts on Foreign Investments

Foreign Direct Investments are long-term investments by companies where the foreign investor has the right to make decisions in the running of the company as well.

Generally the literature distinguishes between two major categories:

- Greenfield Investments
- Mergers & Acquisitions (M&A)

Greenfield Investments are newly founded enterprises in a foreign country and a merger is a fusion with another company. An acquisition is a takeover of a certain enterprise where the company being bought gets paid for it. This means that an enterprise or shares in it are sold to another one. Mergers and acquisitions make up about 80% of the worldwide FDI.[54]

Only Greenfield Investments help to create new jobs and to widen the production capacities, whereas M&As have an opposite effect on the economy. In addition to that local research activities are extremely reduced for the benefit of the parent company. Furthermore M&As help to create market concentration and could reduce national competition.[55]

Greenfield Investments account for about 60% of the whole investments in Eastern European countries, but the tendency toward M&As increases on the international market.[56]

M &As can be divided into the following categories:[57]

- Management Buy Out (MBO)
- Leveraged Buy Out (LBO)
- Management Buy In (MBI)
- Acquisition

Management Buy Out (MBO) means that most of the enterprise is bought by its managers, because they want to be independent from the previous policy of the enterprise and develop the company on their own. If, on the other hand the enterprise is financed with more borrowed capital and the owners of the company that is intended to be bought are getting an offer, which is over the market value, the deal is called a Leveraged Buy Out (LBO). One expects an increase of the profitability of the own capital through the use of borrowed money. A Management Buy In (MBI) is an acquisition by foreign managers who are working actively in the enterprise. Acquisition means that a third person is buying an enterprise either by purchasing the shares of an enterprise or by obtaining its assets.

A study in 2001 defined Foreign Direct Investments (FDI) for research purposes as a corporate investment where the owners hold more than 10%. Direct Investment includes the following forms:[58]

- Enterprises completely owned by foreign investors
- Joint Ventures
- Technology Transfers
- Licensing and other Alliances

Countries in transition are gaining the following advantages through Foreign Direct Investments (FDI):[59]

- FDI are an important financing source
- New Technologies can be created
- The investing company brings management know-how to the transition country
- Competition can be created in the transition country
- The unemployment rate of the transition country can be reduced
- More taxes can be received from the invested country

3.2. Reasons for Investments

Table 1 Direktinvestitionen in den Ländern Ost- und Mitteleuropas, 1997 - 2000

Abbildung in dieser Leseprobe nicht enthalten

Source: Erste Bank, Wirtschaftsbrief 32/2004

Table 1 shows clearly that FDI have steadily grown in the Eastern European countries (CEC) since 1997. There have been almost three times more FDI within a period of five years in these countries. The reasons for this increase of FDI were the fall of communism and the decrease in political risks, which contributed to more political stability.

A major impact for the rise of FDI in the former communist countries was also that they were on their way to join the EU, which meant a future elimination of trading barriers and therefore these companies were eager to gain a market share in these countries.

In addition, the workforce in these countries was and still is much cheaper than in the rest of Europe, which usually resulted in a higher profit for the investing companies.

Furthermore the workforce was not only cheaper for the investing companies, but education had also become comparable with the Western education standards, which helped the people from the CEE countries to gain better skills and this increase of skills was a factor that made this market more attractive for foreign investors.

Table 2 shows that the main motive for foreign investments from the EU and the rest of the world was the market potential. All the other motives, such as wage costs, tax matters, raw materials and others were of minor importance for foreign investments.

Table 2 Motive für die Auslandsbeteiligung: Erhebung 1999

Abbildung in dieser Leseprobe nicht enthalten

Source: Austrian National Bank

The reasons for FDI may be manifold and may differ from country to country. The above-mentioned ones are only examples. That is why the various motives will be examined more closely, such as the Austrian example of FDI in the CEE region.

3.3. Motives for Austrian enterprises to make FDI in the CEE

Table 3 shows the Austrian part of new FDI in the CEE region in 2002.

Table 3 Verteilung der Neuinvestitionen Österreichs in Mittel- und Osteuropa, 2002

Abbildung in dieser Leseprobe nicht enthalten

Source: Erste Bank, Wirtschaftsbrief 32/2004

According to table 3 Austria played a major part in new FDI in this region. In the Czech Republic alone new foreign direct investments by Austrian enterprises were 35%, Poland 26%, Croatia 15%, and in Slovakia they amounted to 7% in 2002.

Thus Austria not only played a major role concerning new FDI in the region, but it could also gain a considerable market share in Eastern Europe over the years. At the end of 2001, Austrian FDI market share reached 8.5% of the total FDI in the Czech Republic, 20.4% in the Slovak Republic, 9.7% in Hungary, 2.3% in Poland and 25.9% (which is more than a quarter of the total market share of FDI in the country) in Slovenia.

Table 4 Austrian market share in Eastern Europe: stocks

Abbildung in dieser Leseprobe nicht enthalten

Table 4 shows clearly how important Austria is as a foreign direct investor for the CEE region.

Austrian Foreign Direct Investments in the CEE region are a very young historical phenomenon. Many investments go back to the 19 th century, but they were not made via the process of internationalization. They were mainly made, because of the fall of the Austro Hungarian monarchy. Considering the period, where reliable and comparable information is obtainable, one can see that in the 60s only a few 10 th points of the Gross Domestic Product (GDP), in the 70s about 1% of the GDP and by 1988 only up to 4% of the Austrian GDP were invested in foreign countries. The consequence of that when the part of worldwide strategic foreign investments reached between 5,5 to 6% of the World Gross Domestic Budget, the Austrian share of foreign investments was only 0.7% of the Austrian GDP.[60]

Nevertheless Austrian companies had made some investments in neighboring countries before 1997. Therefore the motives for Austrian enterprises to make FDI in the CEE will be examined here in order to demonstrate motives of FDI.

These motives for Austrian FDI in the CEE region can be divided in two groups:[61]

Market driven

- Supply oriented

Market driven factors are indicated in Table 5. These factors were most important for Austrian enterprises to make FDI, whereas supply oriented factors such as the costs for wages were less important for Austrian investors.

Table 5 Market driven factors

Abbildung in dieser Leseprobe nicht enthalten

Source: Beer/Bellak/König/Tolunary/Winklhofer/Altzinger, Fragebogen über die Motive für Direktinvestitionen österreichischer Unternehmen, WU-Wien, Sommer 1997

Core industrial sectors included products such as mechanical products, electric products and the car industry. The seven main groups indicated in the table made up 78% of Austrian FDI in the CEE in 1995.[62]

Investors from the finance and insurance sector saw the market potential and the proximity to customers as the main reasons for FDI in the CEE. The most important factors for the food and beverage industry were the market potential and the creation of an export basis.

The Austrian construction, trade, petroleum sector and the other two sectors, apart from the core sector, considered the market potential of the CEE as most important for their FDI.

It is striking that the core sector was the only sector where the low costs for wages were most important for Austrian investors within this sector. Unfortunately, the reasons for that were not explained in Atlzinger’s questionnaire or in the literature.

One of the reasons why the low costs for wages were mainly important for Austrian enterprises of the core sector to make FDI in the CEE could be that many of the goods in this sector that were being produced were done so through progressive manufacturing where highly qualified people were not essential and practically anyone could be trained to do the necessary work. Therefore it did not really matter for the enterprises where the person doing the work came from, as long as the enterprises were getting cheap labour and workforce was much cheaper in the CEE than in Austria.

In addition to that the CEE had a skilled workforce that was useful in the car production industry. These people were very motivated and willing to do the work an Austrian would normally do for a much higher salary, which meant increasingly low wage costs for the Austrian investors.[63]

Austrian management know-how in combination with cheap labour from the CEE could become very interesting for Austrian investors of the core sector in the near future.

3.4. FDI by Economic Sector

In order to conclude how FDI was made by each economic sector within the CEE region, it is important to demonstrate the FDI inward stock by main activities in the first place.

Table 6 FDI inward stock by main activities, per cent

Abbildung in dieser Leseprobe nicht enthalten

Table 6 shows that the main sector, which received FDI until 2002 was the manufacturing sector. In 1998, 53% of the whole FDI per country was invested in the Slovenian manufacturing sector and the same sector got 49.1% of the FDI per country in Slovakia. Within this sector there were general ups and downs throughout the years, but the distance to the other sectors remained incredibly high. Therefore the average distance to the other sectors was always doubled.

The second sector with FDI inflow was harder to reveal, because there was a general change between G, which included trade, and repair of motor vehicles , and J comprising financial intermediations. Also other non-classified activities gained importance for FDI inflow. It is striking that they made up 28.7% in Poland and nowhere else in the region in 1998 and even this record was never reached again afterwards in the region.

Unfortunately, these activities were only mentioned as other not classified activities, which made it impossible to describe the reason for this drastic and sudden change.

The other sectors were only of minor importance for FDI in the CEE region.

3.5. Countries attracting major foreign investments

The total amount of FDI in the CEE was about EUR 28.977 bil. in 2002. Only four examples of the CEE region are displayed here in order to show the huge amount of FDI that was in this region and the countries with the biggest investments.

These four countries are:

- Hungary
- Slovenia
- The Czech Republic
- Slovakia

Poland, although having had a share of 26% of the whole FDI in Eastern Europe at the end of 2002, will not be considered in the analyses due to the fact that it neither has a similar size in terms of economy or population, nor borders Slovakia. Even though Slovenia does not border Slovakia, it remains a good comparator, because of its similar size.

[...]


[1] StaroŇová, K. (n. d.) p. 1.

[2] CIA (1996)

[3] STARON, J. (2005) p. 102.

[4] STARON, J. (2005) p. 104.

[5] Ibid.

[6] STARON, J. (2005) p. 102; cf. Euractiv.sk (2006); cf. MIHALIKOVA, S. (2000) p. 5-7.

[7] EPERJESIOVA, L. (1999) p. 80.

[8] STARON, J. (2005) p. 103.

[9] STARON, J. (2005) p. 103.

[10] Ibid. p. 104.

[11] Ibid.

[12] StaroŇová, K. (n. d.) p. 1.

[13] STARON, J. (2005) p. 105.

[14] Mečiar, V. (1994).

[15] DULEBA, A. (1998) p. 9.

[16] SAMSON, I (1997) p. 27.

[17] DULEBA, A. (1998) p. 7.

[18] Kipke R. / VodiČka K. (2000) p. 139.

[19] Mesežnikov, G. (n. d.) p. 1.

[20] Ibid. p. 2.

[21] Schönfeld, R. (2000) p. 237.

[22] Ibid.

[23] Ibid. p. 238.

[24] Ibid. p. 238-239.

[25] Brandstaller, T. (2001) p. 44-47.

[26] STARON, J. (2005) p. 110.

[27] Mesežnikov, G. (1997) p. 15.

[28] L’uba, L. (1999) p. 798.

[29] DULEBA, A. (1998) p. 10.

[30] Ibid.

[31] DULEBA, A. (1998) p. 15.

[32] STARON, J. (2005) p. 124-125.

[33] Báchora, R. (2003) p. 20.

[34] Mesežnikov, G. (1998) p. 42.

[35] Báchora, R. (2003) p. 20.

[36] OFFICE OF DEMOCRACY AND GOVERNANCE (1999) p. 20.

[37] Ibid.

[38] Haughton, T. (n. d.) p. 5; cf Henderson, K. (1999 pp. 221-240.

[39] Ibid. p. 8.

[40] Haughton, T. (2002) p. 1319-1338.

[41] Henderson, K. (1999 pp. 221-240.

[42] Pridham, G. (2002b) p. 965

[43] Pridham, G. (2002a) p. 94.

[44] Haughton, T. (n. d.) p. 17.

[45] Haughton, T. (n. d.) p. 4.

[46] Mesežnikov, G. (2002) p. 11-34.

[47] Haughton, T. (2003) p. 65-90.

[48] Alner, J. (1999) p. 317.

[49] Zatkuliak, J. (1999) p. 10.

[50] Báchora, R. (2003) p. 18-22.

[51] STARON, J. (2005) p. 109.

[52] Ibid. p. 112.

[53] Vodička, K. (2000) p.913.

[54] Österreichische Forschungsstiftung für Entwicklungshilfe (n. d.); cf. Lechner / Egger / Schauer (1999) p. 235.

[55] HARTIG, S. (n. d.).

[56] Ibid.

[57] Lechner / Egger / Schauer (1999) p. 235.

[58] Biegelbauer / Grießler / Leuthold (2001).

[59] HARTIG, S. (n. d.).

[60] UNCTAD (2001).

[61] Beer / Bellak / König / Tolunary / Winklhofer / Altzinger (1998).

[62] Beer / Bellak / König / Tolunary / Winklhofer / Altzinger (1998).

[63] STARON, J. (2005) p. 113-115.

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Details

Title
Socio-Economic Transformation of Slovakia since its Independence
Subtitle
How far were Vladimír Mečiar’s policies successful in attracting foreign investments into Slovakia?
College
Fachhochschule des bfi Wien GmbH
Grade
2
Author
Year
2006
Pages
130
Catalog Number
V115909
ISBN (eBook)
9783668349230
ISBN (Book)
9783668349247
File size
1194 KB
Language
English
Tags
Socio-Economic, Transformation, Slovakia, Independence
Quote paper
Thomas Kovacs (Author), 2006, Socio-Economic Transformation of Slovakia since its Independence, Munich, GRIN Verlag, https://www.grin.com/document/115909

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