Transcript Encouraging entrepreneurs: Slovak story

Encouraging entrepreneurs:
Slovak story
Martin Vlachynsky
Institute of Economic and Social Studies (INESS)
Independence: 1993
EU: 2004
Eurozone: 2009
49 035 km2
5 400 000 inhabitants
GDP (2012) 71,4 billion EUR
76% of EU28 per capita GDP average
Exports to GDP: 90% (Among highest in the world)
Industry:
• Automotive (largest per capita car producer in the world)
• Electronics industry
• Metallurgy
10.5
4.4
5.8
6.7
5.1
4.8
-6.9
-4.9
0.9
1.3
1.8
2.2
3.0
3.3
4.0
4.6
5.6
5.8
5.2
6.5
8.3
% GDP growth
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
% Unemployment
25.0
20.0
18.6
19.2
18.5
17.4
18.1
16.2
15.0
13.7
12.7
16.2
14.4
13.1
11.3
11.8
13.3
12.5
13.6 14.0
12.1
11.0
9.6
10.0
5.0
0.0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
52.4
43.4
41
35.6
27.9
29.6
30.5
42.4
41.5
34.2
34.5
33.7
22.1
31.1
43.4
48.9
50.3
47.8
57.2
% PUBLIC DEBT
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Phase 1 (1993-1998)
“A black hole in the heart of Europe”
• Solid Growth
• High, but stabilized unemployment
BUT
• Fiscal expansion (average 6% budget deficit)
• Lack of foreign capital (average FDI only 1,6% of GDP)
• Deteriorating health industries
• Deteriorating banking system (“free” cash source), 6 banks bankrupted
• Authoritative regime- exclusion from western structures (excluded from the Luxembourg summit 12/1997)
Phase 2 (1998-2009)
“Tatra Tiger”
• Unemployment halved
• FDI Growth 1999-2002 reached 1100%
• Catching up with EU accession (negotiations started 2 years later compared to
CR)
• Declining debt to GDP ratio
• World’s 15th soundest banking system (2009), 6th among EU members (2013)
• Ranked 32/155 in Doing Business (2006)
• 2nd East European country to enter Eurozone
Reasons behind
• Bank bailout (12% GDP cost) & sale
• Foreign investors allowed to enter troubled utilities sector (however no price deregulation, regulatory
body independent only formally)
• Improved fiscal and debt management – established Debt and Liquidity Management Agency, mid term budgeting, ESA 95 (accrual instead of cash)
• Municipal budget reform (share on tax revenues instead of negotiations)
• Labor code reform - more flexibility in lay-offs and reduced powers of trade unions
• Compulsory private pension pillar established
• Small improvements in legal disputes
• Higher transparency - information right (2000), centralized (2000) electronic public procurement
(2007), contracts published online (2011)
• Bureaucracy improvements (business registry reforms, land registry reforms…)
• Inflows of EU funds (however, especially later in the 2007-2013 period)
• Generous tax breaks
“Flat” Tax Reform:
• Five rates of personal income tax (10%-38%) merged to 19%*
• Corporate rate cleared of exemptions and cut from 25 % to 19 %
• Two VAT rates (14 % and 20%) were unified at 19 %
• Dividend tax, inheritance tax and gift tax were cancelled
• Tax code simplified
Phase 3 (2009-?)
The Crisis
• Reforms stopped in 2006
• One of the biggest crisis related GDP growth drops
• Rising unemployment (among the highest in EU)
• Quickly deteriorating public finance – export trap (GDP growth vs Revenue growth)
• Falling competitiveness (32nd -> 49th)
• Highest corporate tax rate in CEE (2013) - from 19% to 22%
• Tax code more complicated (especially VAT compliance)
• Bank tax among the highest in EU (30x German rate)
• No improvements of extremely low legal framework efficiency (143/148 in GCI)
Competition policy
State aid broadly used by new members: 2000-2003 situation
(excluding agriculture and transport)
Annual average (mill. EUR)
Malta
159
Cyprus
285
Czech Republic
1980
Poland
2140
Hungary
571
Slovenia
139
Slovakia
118
Lithuania
23
Latvia
34
Estonia
7
EU 10 average
5650
EU 15 average
3400
% of GDP
3,86
2,85
2,8
1,29
1,04
0,69
0,51
0,26
0,24
0,11
1,24
0,04
Competition policy
• First chapter opened, one of the last (28th} closed, lot of problems
• Missing conception (state aid was view as a standard policy tool)
• Negotiations about sensitive exemptions (especially VW and US Steel – transitional period)
• Way of funding state owned enterprises and funds (receiving large guarantees on debts)
• First law version was failure
• Illegal exemptions (forestry companies exclusion etc.)
• Conflicting definition of SME – exempt from scrutiny
• Mechanical copying (EU legal state exempted aid of 15 mill. ridiculous in Slovak reality)
• Controversial Bureau of state Aid (f.1999) – competency problems, allowing illegal aid
Competition policy
• Bureau of state Aid closed 5/2004, competitions moved to Ministry of Finance/Commission
• State aid more systematic and transparent, in respect of EU laws (however, full legal compliance with EU not
until 2009)
• State guaranteed commercial monopolies (post, telecommunication, TV…) turned into licensing system
Investment stimulus
Number of
stimulus
Stimulus sum
(EUR)
Planned new jobs
Cost per job (EUR)
2002
1
12 746 465
582
21 901
2003
1
166 018 388
3 500
47 434
2004
18
313 402 342
8 880
35 293
2005
0
0
0
0
2006
48
357 887 436
15 214
23 524
2007
16
190 038 092
6 113
31 088
2008
5
42 667 673
2 199
19 403
2009
8
75 270 583
2 976
25 293
2010
11
39 067 024
1 350
28 939
2011
10
64 930 195
2 120
30 627
2012
10
121 191 498
2 412
50 245
2013
11
60 853 168
2 459
24 747
139 1 444 072 864
47 805
30 208
Sum
Stimulus and Opportunity Cost
Year
Corporate tax rate
Possible rate cut
2002
25%
24,7%
2003
25%
21,3%
2004
19%
13,9%
2005
19%
19,0%
2006
19%
14,7%
2007
19%
17,0%
2008
19%
18,6%
2009
19%
18,1%
2010
19%
18,6%
2011
19%
18,3%
2012
19%
17,6%
2013
23%
22,3%
Average per job cost represents 5 years of net median wage (more in the early 2000’)
Stimulus spent mainly in richer regions
Below average
unemployment
Over average
unemployment
Number of stimulus
Sum of stimulus
Planned job creation
19
21
978 488 995
465 583 869
30 167
17 638
• “Chaining” of stimulus (Stimulus to keep jobs created with previous stimulus)
• Relapse from “tax exemptions only” back to direct financial contributions
• Inability to negotiate generally agreed rules (Goals often contradicting - Big? SME? New? Existing? Hi tech? #
of jobs? In poor regions?)
• Number of created greenfield industrial parks failed to attract investors, especially in poorer regions,
resembles socialistic central planning (“One factory for every valley!”)
• Aid in richer regions leads to buying competitor’s employees
• State aid contributed to one-sided economy (Automotive, Electronics)
• Everybody (fulfilling criteria) is entitled, but Ministry of finance decides projects to push to parliament
Conclusion
• Slovak economy was kickstarted within a short time, state aid
extensively used
• One of the most difficult chapters, government held to the
state aid tools as long as possible
• Still extensively used, but long term effect disputable
Thank You!
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