BRATISLAVA – Two decades after Czechoslovakia split into two countries, former straggler Slovakia has been transformed, having joined the eurozone and boasting solid growth while its neighbor grapples with recession.
Czechoslovakia, founded in 1918 as World War I brought down the Austro-Hungarian empire, broke up peacefully on Jan. 1, 1993, just over three years after the federation’s four-decade communist regime crumbled.
The former command economy then slid into recession, but with a solid industrial infrastructure, the new Czech Republic and its population of 10.5 million recovered faster than Slovakia, a nation of 5.4 million.
The communists had also shifted Slovakia’s focus from agriculture to industry, particularly to metallurgy, mining and — given its greater distance from capitalist Western Europe — arms manufacturing.
But “after the fall of communism and dissolution of the Soviet bloc’s Council for Mutual Economic Assistance, Slovakia found itself with no markets to export to and as the factories closed, unemployment increased rapidly,” said Vladimir Balaz, an economist at the Slovak Academy of Sciences.
The Czech Republic, heavily dependent on the car industry, pursued market-friendly reforms and attracted foreign investors under Prime Minister Vaclav Klaus, an economist by profession.
Meanwhile, Slovakia, governed by authoritarian Prime Minister Vladimir Meciar, struggled to prove itself as a democracy.
Foreign investors avoided the country, which was excluded from EU accession talks in 1997 and labeled by then-U.S. Secretary of State Madeleine Albright, who is of Czech origin, as “a black hole of Europe.”
Volksbank senior analyst Vladimir Vano explained that “with huge public investments into highway construction, Slovakia’s output grew, but so did its debt and public finance deficit.
“At one point in 1998, Slovakia’s borrowing costs at international markets reached an unsustainable 29.9 percent for its T-bills,” he added in reference to shorter-term debt.
In a 1998 election, a broad anti-Meciar coalition led by Mikulas Dzurinda was propelled into power, but the overheated economy landed hard, with the jobless rate rocketing to 20 percent and a severe currency depreciation. Dzurinda’s government launched an austerity program that aimed at heavy cuts to the debt and public deficit, recapitalized and privatized banks, and implemented reforms that opened Slovakia to foreign investors.
A 19 percent flat tax on personal and company revenue introduced by Dzurinda’s second government in 2004 gave Slovakia the perfect sales pitch to attract global car and electronics groups, such as Germany’s Volkswagen, France’s PSA Peugeot Citroen, South Korea’s Kia and Samsung, and Taiwan’s Foxconn.
But as business flourished, the gap between affluent western Slovakia, including the capital, Bratislava, and poorer eastern regions widened.
“Considering the average salary, regional disparities are bigger in Slovakia compared to the Czech Republic,” Vano said.
“Czech pensioners have higher pensions, Czech teachers earn more than Slovak teachers, their educational system and science are more developed than ours and their life expectancy is higher,” said Juraj Mesik, a former World Bank Community Foundation specialist.
But Slovakia has let its macroeconomic data do the talking.
Analysts at the Trend weekly calculated that Slovakia’s output has grown by an average of 4.6 percent in the past 20 years, while the Czech Republic has expanded by 2.8 percent.
With an economy fueled by exports to the eurozone, notably Germany, Slovakia has profited from its entry into the 17-member single-currency bloc in 2009.
Analysts in Bratislava said the Czech Republic, which boasts similarly close ties to Germany, will also profit from joining the euro. But despite having joined the EU in 2004 along with Slovakia, the Czech Republic remains euroskeptic, with no entry date in sight.
Next year, Slovakia is set to become one of the eurozone’s most rapidly-expanding economies, with a rate of 2 percent, while the Czech Republic hopes to recover from a forecast recession this year and post growth of 0.8 percent.
“We are still worse-off than the Czechs, but considering how deep we could have fallen in the first years after the federation split, Slovakia is a real success story,” Mesik said.