20th anniversary of the Slovak Republic's OECD membership: Achievements and remaining challenges

20th anniversary of the Slovak Republic’s OECD membership Achievements and remaining challenges

ACKNOWLEDGEMENTS The work underlying this report was prepared by Priscilla Fialho, with inputs from Oliver Röhn, Gabriel Machlica, Hyunjeong Hwang and Oliver Denk, and guidance from Álvaro Pereira, Isabell Koske and Mame Fatou Diagne (all OECD Economics Department). Federico Giovannelli provided excellent statistical assistance. The work also benefited from comments by the authorities of the Slovak Republic, in particular the Ministry of Finance, the Ministry of Environment, the Ministry of Health and the National Bank. Andrew Esson prepared the report for publication. The team is also grateful to Tomáš Besedič, Economic Counsellor, Permanent Delegation of the Slovak Republic to the OECD, for his support to the project and to the Ministry of Finance, the Ministry of Foreign and European Affairs and the National Bank of the Slovak Republic for financial contributions.

Disclaimer This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

20th anniversary of the Slovak Republic’s OECD membership Achievements and remaining challenges

Table of contents Foreword 1. Twenty years of strong growth until the coronavirus crisis 2. Ambitious reforms boosted the convergence path 3. Reforms must continue References FIGURES Figure 1. The Slovak economy has narrowed the GDP gap to the highest-income OECD countries Figure 2. The current crisis severely interrupts years of strong growth Figure 3. Economic growth has been mostly driven by improvements in labour productivity Figure 4. Capital investment underpinned productivity developments until the global financial crisis Figure 5. FDI inflows were particularly high until the

5 10 18 30 50

10 11 11 12

13 global financial crisis Figure 6. The Slovak Republic is mainly positioned in the downstream activities of global value chains 13 Figure 7. The Slovak Republic’s openness to trade has increased steadily 14 Figure 8. Labour market outcomes improved significantly before the pandemic 15 Figure 9. Improved labour market performance has 16 led to higher wages Figure 10. Households have enjoyed higher disposable income over time 16

Figure 11. Income inequality remained low 17 Figure 12. The Slovak Republic has become more inclusive towards some vulnerable groups 17 Figure 13. Substantial efforts were made to stabilise the public finances and reduce external imbalances 19 Figure 14. Public expenditures decreased faster than revenues until the global financial crisis 20 Figure 15. The long-term interest rate fell sharply in the early 2000s 21 Figure 16. Inflation fell and became more stable over time 22 Figure 17. The banking sector became more resilient 23 Figure 18. Banks became more accessible and efficient 24 Figure 19. More financial resources have been redirected to the private sector 24 Figure 20. Product market regulation became less strict over time 25 Figure 21. Improvements in the business environment have slowed recently 26 Figure 22. The tax burden was lowered, but social security contributions remain high 27 Figure 23. The minimum wage fell significantly in the 1990s and has remained below most neighbouring countries 28 Figure 24. Labour market regulation became more flexible 29 Figure 25. Productivity gains have been modest in the services sectors 31

CONTENTS | 3

Figure 26. Domestic value added embodied in exports is still low 32 Figure 27. Employment is vulnerable to the international environment 32 Figure 28. Public support to business R&D is insufficient 33 Figure 29. Capital markets remain underdeveloped 34 Figure 30. Regional disparities remain high 35 Figure 31. Most of the Roma population is at risk of poverty 36 Figure 32. Students’ education outcomes are weak 38 Figure 33. Teachers’ remuneration is low by international standards 39 Figure 34. Spending on education is low and inefficient 39 Figure 35. Qualification and educational mismatch in the Slovak Republic is high and costly 40 Figure 36. The share of jobs at risk of automation is the highest in the OECD 40 Figure 37. Participation in adult education should be further increased 41 Figure 38. Spending on ALMPs is low by international standards 41 Figure 39. Deaths caused by cancer and cardiovascular diseases are among the highest in the OECD 43 Figure 40. Many deaths are preventable 44 Figure 41. Older individuals’ activity is severely limited by health problems 44 Figure 42. Workers retire early compared with other OECD countries 46

Figure 43. Replacement rates are higher than in CEEC, while contribution rates are much lower 47 Figure 44. Savings in the second pillar are low despite high tax incentives 48 Figure 45. Progress was made on greenhouse gas emissions but air pollution remains a serious concern 49 TABLES Table 1. OECD recommendations to strengthen services and transport infrastructures 32 Table 2. OECD recommendations to boost innovation and knowledge-based capita 34 Table 3. OECD recommendations to improve inclusiveness 36 Table 4. OECD recommendations to improve public sector efficiency 37 Table 5. OECD recommendations to improve the quality of education and lifelong learning 42 Table 6. OECD recommendations to increase health-care efficiency 45 Table 7. OECD recommendations to ensure the long-term sustainability of public finances 47 Table 8. OECD recommendations to improve the environmental quality

50

4 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Transforming the Slovak Republic into a knowledge-based society will be key to sustain economic development and convergence to the highest-income OECD countries.

FOREWORD | 5

Foreword Since joining the OECD in 2000, the Slovak Republic has continuously ranked among the fastest growing OECD economies, progressively catching up with higher-income countries. Labour market performance and living standards have improved at a high pace, while inequality remained low. In 2019, the typical Slovak worker earned 70% more than 20 years earlier.

Macroeconomic and financial stabilisation, privatisations, changes in business regulations, tax reforms and policies to foster labour market dynamism were all key to promote economic growth and convergence to higher-income countries. Together with its favourable geographical position, this contributed to make the Slovak Republic one the most sought-after investment destinations in Europe.

However, the convergence process, relying strongly on foreign direct investment and international trade, started to moderate after the global financial crisis. The COVID-19 pandemic has further highlighted the Slovak Republic’s vulnerability to changes in the international environment and cyclical fluctuations among its trading partners.

Transforming the Slovak Republic into a knowledge-based society will be key to sustain economic development and convergence to the highest-income OECD countries. This requires strengthening its innovative capacity and improving the quality and efficiency of public services, such as health and long-term care, and judicial services. The Slovak Republic also needs to reap the benefits from a more age-diverse workforce to avoid that population ageing jeopardises investment and the long-term sustainability of the public finances.

OECD formally invites the Slovak Republic to accede to the OECD Convention – Signature ceremony, 28 September 2000, Château de la Muette, Paris.

Left to right: Mrs Brigita Schmögnerová, Minister of Finance; HE Eduard Kukan, Foreign Affairs Minister; HE Ivan Miklos, Deputy Prime Minister for Economy; Donald J. Johnston, OECD Secretary General; Thorvald Moe, OECD Deputy Secretary General.

6 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

The Slovak Republic should prioritise double-dividend reforms that, on the one hand, bring short-term benefits to revive the economy in the aftermath of the COVID-19 pandemic and, on the other hand, address long-standing structural challenges and obstacles to faster potential growth.

This brochure has three parts. The first part describes the convergence process of the Slovak Republic so far. The second part highlights the main reforms that have contributed to the country’s economic success. The third part identifies remaining challenges and priorities for the road that lies ahead.

Signature ceremony, 28 September 2000, Château de la Muette, Paris. Left to right: Peter Brno, State Secretary for Economy; Mrs Brigita Schmögnerová, Minister of Finance; HE Ivan Miklos, Deputy Prime Minister for Economy; Donald J. Johnston, OECD Secretary General; HE Eduard Kukan, Foreign Affairs Minister; Dusan Bella, Counsellor, Head of the OECD Section, Slovak Embassy in Paris.

FOREWORD | 7

Labour market performance and living standards have improved at a high pace, while inequality remained low. In 2019, the typical Slovak worker earned 70% more than 20 years earlier.

8 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

ANGEL GURRÍA, OECD Secretary-General “The Slovak Republic has made remarkable progress in raising living standards since joining the OECD 20 years ago. In those two decades of fruitful collaboration, our partnership has gone from strength to strength.

As an active OECD member, the Slovak Republic has engaged in the exchange of best practices, knowledge and advice, and helped set international standards. As the Slovak Republic grapples with the COVID-19 pandemic, the OECD will continue to offer support through in-depth analysis, dialogue and evidencebased policy recommendations that will help the Slovak Republic back onto a path of inclusive, resilient and sustainable growth.”

EDUARD HEGER, Deputy Prime Minister and Minister of Finance of the Slovak Republic "The integration process of the Slovak Republic into international structures was challenging. Therefore, the day when the Slovak Republic became a full member of the club of the most advanced economies in the world – the OECD, will belong forever among the celebrated dates in our history. Over the past 20 years the world and Slovakia have changed significantly, however the values we share remain the same and our cooperation with the OECD offers new opportunities. The OECD is an outstanding global organization, its unique value is the human capital and the knowledge. It is both a close partner "in good times and bad times" as well as a wise advisor, we could rely on its guidance either during the integration process into the EU and the Euroarea or the successful transformation of the Slovak economy. I am glad that we can count on the OECD even in the current turbulent period, when the global economy is in the midst of the greatest economic and health crisis since the establishment of the OECD. Dear colleagues, I look forward to further close cooperation with the OECD!" PETER KAŽIMÍR, Governor of the National Bank of Slovakia "The Organisation for Economic Co-operation and Development is essentially a big library of knowledge, data, analysis, and international best practice sharing. Our library card was issued 20 years ago and it has been one of our most valued memberships to date. As Benjamin Franklin famously said, “An investment in knowledge pays the best interest”. The OECD was an invaluable ally of Slovakia throughout our European integration process. En route to the European Union and the euro area, the OECD helped us nourish our appetite for reform in many challenging areas. The greatest value of the OECD lies, however, beyond what it can do for individual countries, and rather in what it does for the broader global community. Just one of the OECD’s more recent achievements has been its successful leadership of the fight against international tax evasion. The war is not yet won, but I am confident that, by maintaining current efforts, we will get there together. In 2019 Slovakia chaired a successful OECD Ministerial Council Meeting and there could be no better way for the country to mark its two decades of OECD membership."

2019 MINISTERIAL COUNCIL MEETING | 9

OECD Ministerial Council Meeting, May 2019, OECD, Paris. Left to right Peter Pellegrini, Prime Minister; Angel Gurría, OECD Secretary General.

Launch of the 2019 OECD Economic Survey of the Slovak Republic, 5 February 2019, Bratislava.

Left to right Angel Gurría, OECD Secretary General; Peter Žiga, Minister of Economy; Peter Kažimír, Deputy Prime Minister and Minister of Finance.

10 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP

1. Twenty years of strong growth until the coronavirus crisis The Slovak Republic’s economy has performed strongly since it joined the OECD The Slovak Republic joined the OECD in 2000. In the two decades since then, it has been catching up with higherincome OECD countries and continuously ranked among the fastest growing economies (Figure 1; European Commission, 2015). Growth was particularly impressive before the global financial crisis. Until 2008, the Slovak Republic’s average annual per capita growth rate was significantly higher than neighbouring countries with similar initial levels of GDP per capita (Figure 2). The Slovak Republic was the first Central European country to join the euro area and, at the time, the fastest-growing country in the European Union (Daborowski, 2009).

At around 2008, the convergence process towards higher-income OECD countries slowed somewhat. The 2008-09 crisis and the subsequent 2010-13 European sovereign debt crisis affected the Slovak Republic more than peers from the Visegrád group (the Czech Republic, Hungary and Poland). Global investment stalled, demand for capital goods plunged

Figure 1. The Slovak economy has narrowed the GDP gap to the highest-income OECD countries GDP per capita gap to the upper half of OECD countries. Upper half is weighted by the population.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 -10 -20 -30 -40 -50 -60 -70 Source: OECD Going for Growth.

TWENTY YEARS OF STRONG GROWTH UNTIL THE CORONAVIRUS CRISIS | 11

Figure 2. The current crisis severely interrupts years of strong growth Real GDP per capita, index 2000 = 100 SVK

CZE

HUN

POL

SVN

OECD average

220 200 180 160 140 120 100 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Note: The shaded area indicates that data are projections.

Source: OECD Economic Outlook: Statistics and Projections database.

and the Slovak Republic’s economic growth lost momentum. Nevertheless, in 2019, the Slovak economy had doubled in size compared to 2000, whereas the OECD economy as a whole was only 30% larger.

Labour productivity growth – through total factor productivity and capital per worker – was the main driver of economic progress and convergence towards high-income OECD economies. Increases in labour productivity have accounted for around three quarters of potential GDP per capita growth since 2000 (Figure 3).

Rapid accumulation of capital sustained labour productivity growth at least until the global financial crisis (Figure 4).

After the transition in the 1990s, the Slovak Republic had a large capital stock gap and was far away from the technology frontier (European Commission, 2015). Therefore, the potential for fast economic growth through investment in new machinery and equipment was significant.

Figure 3. Economic growth has been mostly driven by improvements in labour productivity Decomposition of the Slovak Republic’s potential output growth, percentage points Capital per worker

Total Factor Productivity (TFP)

Potential employment rate

Potential participation rate

Working age population share

8 7 6 5 4 3 2 1 0 -1 -2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: OECD Economic Outlook: Statistics and Projections database.

12 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 4. Capital investment underpinned productivity developments until the global financial crisis Real gross fixed capital formation, as a percentage of GDP, five-year averages* Slovak Republic

CEEC

OECD

26

24

22

20

18

2001-2005

2006-2010

2011-2015

2016-2019

Note: The CEEC (Central and Eastern European Countries) aggregate includes the Czech Republic, Hungary, Poland and Slovenia (also in all subsequent figures). * Four-year average for the period 2016-2019.

Source: OECD Economic Outlook: Statistics and Projections database.

FDI inflows explain the high levels of investment that sustained productivity growth Foreign direct investment (FDI) was an important building block of the Slovak Republic’s growth model in the 2000s.

Most of the investment in equipment and new machinery came from abroad, following foreign acquisitions of domestic firms and the establishment of foreign business operations in Slovakia. FDI inflows were particularly strong from 2002 until 2008, mainly coming from Germany and other EU countries (Figure 5; Kucharciková, 2013). Economic reforms and increasingly investor-friendly legislation were key to attract such investment (discussed in Part 2).

FDI flew mostly to the electronics and car industries. The number of cars produced in the Slovak Republic increased more than five times over the past decade, making it the world’s largest per capita car producer (OECD, 2019a). The banking sector was also an important destination of foreign investments as a result of significant restructuring (Kucharciková, 2013; discussed in Part 2).

FDI inflows were more subdued after the financial crisis. The financial crisis reduced the worldwide supply of investment funds. Also, euro appreciation with respect to other transition economies outside the euro area reduced the relative attractiveness of the Slovak Republic as an investment location (Fidrmuc and Wörgötter, 2013). Frequent legislation changes imposed by new governments and the associated risk of regulatory uncertainty may have diverted investors from the Slovak Republic to other emerging economies (discussed in Part 3).

Large inflows of FDI contributed to the rapid integration into global value chains (GVCs) in the 2000s. Today, more than 60% of the Slovak Republic’s total exports embody some foreign value added or are used as inputs in another country’s exports, compared with only slightly more than 40% on average in the rest of the world (World Trade Organisation, 2019). The Slovak Republic is mainly positioned in the downstream activities of GVCs, that is, the country extensively uses imported intermediate inputs in its exports, implying that the domestic value added in its exports is low by international standards (Figure 6).

The Slovak Republic’s growing participation in GVCs led to a sharp increase in gross exports and imports. Between 2000 and 2012, the Slovak Republic recorded one of the strongest international market share gains in the OECD (OECD, 2013a). Gross exports relative to GDP more than doubled since 2000 (IMF, 2019b). Imports also increased significantly as domestic consumption and investment picked up. As a result, the Slovak Republic’s openness to trade – measured as the sum of imports and exports out of GDP – increased steadily between 2000 and today, standing well above the OECD average (Figure 7).

TWENTY YEARS OF STRONG GROWTH UNTIL THE CORONAVIRUS CRISIS | 13

Figure 5. FDI inflows were particularly high until the global financial crisis FDI inflows, as percentage of GDP Slovak Republic

CEEC

OCED

25

20

15

10

5

0

-5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: UNCTAD; and OECD Economic Outlook: Statistics and Projections database.

Figure 6. The Slovak Republic is mainly positioned in the downstream activities of global value chains Global value chains participation rates, per cent, 2015 Backward participation in GVCs1

Forward participation in GVCs2

90 80 70 60 50 40 30 20

LUX

SVK

HUN

BEL

CZE

IRL

SVN

EST

KOR

LTU

NLD

POL

AUT

FIN

DNK

MEX

NOR

PRT

CHL

FRA

DEU

CHE

SWE

ISL

LVA

ITA

ESP

GRC

GBR

JPN

AUS

ISR

CAN

TUR

COL

NZL

0

OECD USA

10

1. Backward participation in GVCs: The indicator measures the value of imported inputs in the overall exports of a country (the remainder being the domestic content of exports).

This indicator provides an indication of the contribution of foreign industries to the exports of a country by looking at the foreign value added embodied in gross exports.

2. Forward participation in GVCs: The indicator provides the share of exported goods and services used as imported inputs to produce other countries’ exports. This indicator gives an indication of the contribution of domestically produced intermediates to exports into third countries.

Source: OECD Trade in Value Added (TiVA) database.

14 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 7. The Slovak Republic’s openness to trade has increased steadily Average of imports and exports of goods and services, as % of GDP Slovak Republic

OECD average

100 90 80 70 60 50 40 30 20 10 0

1995-96

2006-07

2016-17

2018-19

Source: OECD Economic Outlook: Statistics and Projections database.

FDI inflows and participation in GVCs generated significant benefits. FDI brought in new technologies, and required new expertise and methods. Substantial empirical evidence confirms that FDI inflows and participation in international trade explain the Slovak Republic’s significant TFP gains since the early 2000s (Bijsterbosch and Kolasa, 2010; Stojcic and Orlic, 2019). The main transmission channel was the use of parent companies’ and foreign suppliers’ technology, business practices and inputs (European Central Bank, 2019).

Improved labour market performance led to higher incomes and well-being Strong economic growth before the coronavirus outbreak was accompanied by positive developments in the labour market (Figure 8). Labour market reforms (Part 2) and FDI contributed to new employment. The foreign assembly plants in the automotive industry directly account for about 3% of total employment in the Slovak Republic. Adding all the jobs created to support that industry, approximately 9% of total employment depends directly or indirectly on these foreign-owned automotive companies (Luptacik et al., 2013). In addition, productivity growth resulted in fast rising wages in the last two decades, although the level of wages remains significantly below the OECD average (Figure 9).

Together with increasing employment and labour force participation, this led to higher household disposable income, slowly reducing the gap towards the OECD average (Figure 10).

However, the labour market was more strongly affected by the global financial crisis than that of peers. Unemployment was stuck at higher levels for longer than in other Visegrád countries. In the years before the crisis, FDI flows were dominated by large greenfield investments, involving new production facilities. In contrast, investment in existing plants became more important after the financial crisis. These investments created fewer jobs (Fidrmuc et al., 2013).

Higher incomes benefited a large share of the population. The share of people at risk of poverty, severely materially deprived, or living in a household with very low work intensity, was halved from 32% in 2005 to 16% in 2019, thanks to improvements in employment and incomes. At the same time, the Slovak Republic managed to maintain low levels of income inequality (Figure 11).

Economic growth effectively translated into better living conditions. According to the latest OECD Better Life Index, in the Slovak Republic, 91% of adults aged 25-64 have completed upper secondary education, much higher than the OECD average of 78% and among the highest rates in the OECD (OECD, 2020). Increasing enrolment in secondary and tertiary education partly accounts for the fact that the percentage of young people, between 15 and 29 years old, not in employment, education or training (NEET), decreased substantially between 2000 and 2005 (Figure 12, Panel A).

TWENTY YEARS OF STRONG GROWTH UNTIL THE CORONAVIRUS CRISIS | 15

Figure 8. Labour market outcomes improved significantly before the pandemic A. Unemployment rate(%) A. Unemployment rate

Per cent Slovak Republic CEEC

OCED

25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

B. Employment rate Per cent Slovak Republic CEEC

B. Employment rate (%) OCED

75 70 65 60 55 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Labourforce forceparticipation participation rate C. C. Labour rate (%) Per cent Slovak Republic

CEEC

OCED

75 73 71 69 67 65 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Notes: The CEEC (Central and Eastern Europe Countries) aggregate includes Czech Republic, Hungary, Poland and Slovenia. The shaded area indicates that data are projections.

The shaded area indicates that data are projections.

Source: OECD Economic Outlook: Statistics and Projections database; and OECD Labour Force Statistics database.

16 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Women, another group often at risk of exclusion from the labour market, have also benefited from economic growth, better labour market outcomes and higher incomes (Figure 12, Panel B). Overall, the Slovak Republic became a more inclusive society, although some groups remain at risk of social exclusion and are particularly exposed to the current economic crisis (see Part 3).

Figure 9. Improved labour market performance has led to higher wages A. Average Wage USD, 2019 constant prices, PPPs SVK

CZE

HUN

POL

B. SVK to OECD ratio Ratio SVK/OECD

OECD average

56

55 000 50 000

53

45 000 50

40 000 35 000

47

30 000

44

25 000

41

20 000 38

15 000

35

10 000 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Note: Average wages are obtained by dividing the national-accounts-based total wage bill by the average number of employees in the total economy, which is then multiplied by the ratio of the average usual weekly hours per full-time employee to the average usual weekly hours for all employees. This indicator is measured in USD constant prices using 2019 as the base year and purchasing power parities (PPPs) for private consumption of the same year.

Source: OECD Employment and Labour Market Statistics database.

Figure 10. Households have enjoyed higher disposable income over time A. Real household disposable income per capita USD per capita, 2015 constant prices, PPPs SVK

OECD average

B. Ratio SVK/OECD Ratio SVK/OECD

30 000

75

25 000

70

20 000

65

15 000

60

10 000

55

5 000

50 45

0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Note: Household disposable income per capita is calculated by dividing data on gross household disposable income by the total population. This indicator is measured in USD constant prices using 2015 as the base year and purchasing power parities (PPPs) for private consumption of the same year.

Source: Calculations based on OECD National Accounts database and OECD Economic Outlook: Statistics and Projections database.

TWENTY YEARS OF STRONG GROWTH UNTIL THE CORONAVIRUS CRISIS | 17

Figure 11. Income inequality remained low A. Gini coefficient after taxes and transfers 0-1 scale SVK

B. Ratio of the average income of the top 20% to the bottom 20%

OECD average

SVK

OECD average

0.35

6.0

0.33

5.5

0.30

5.0

0.28

4.5

0.25

4.0

0.23

3.5

0.20 2004

2006

2008

2010

2012

2014

2016

2004

2006

2008

2010

2012

2014

2016

3.0

Source: OECD Income Distribution database.

Figure 12. The Slovak Republic has become more inclusive towards some vulnerable groups A. Youth not in employment, education or training (NEET) 15-19-year-olds, % in the same age group SVK

OECD average

B. Gender gap in income Men-women gap in median earnings relative to men's, % SVK

OECD average

30

22

25

20

20

18

15

16

10

14

5

12

0

10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: OECD Education at a Glance database; and OECD Earnings database.

The coronavirus pandemic threatens to further slow the convergence process Even before the current crisis, the convergence process, largely driven by FDI and export growth, started to show some signs of moderating. The coronavirus pandemic could slow the pace of convergence even further. Plummeting world trade and disruption in global value chains have hurt the export-dependent manufacturing sector. High uncertainty surrounding the duration of the pandemic will likely keep domestic and foreign investment at low levels for some time.

Furthermore, foreign demand is likely to recover only gradually weighing on export growth.

In addition, the COVID-19 pandemic will likely lead to continuing disruptions in the labour market. Some sectors may face extended low demand, for example due to physical distancing requirements and changes in consumer preferences.

Other sectors may be particularly affected by changes in production and global value chains, a shift to remote working and the increasing use of digital technologies. Adjustment to these challenges will require labour reallocation.

18 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP

2. Ambitious reforms boosted the convergence path A number of key economic reforms helped to support the convergence process The Slovak Republic’s economic success has benefited from the inflow of FDI coupled with structural reforms.

Recognising that multinational corporations play an important role in trade, capital accumulation and economic growth in transition economies, the authorities made substantial efforts to attract foreign investors. Such efforts included not only macroeconomic and financial stabilisation, but also structural reforms in the business environment, taxation, public administration, labour market regulations.

International relations have also profoundly changed with the Slovak Republic’s accession to the OECD in 2000 and adhesion to NATO and the EU in 2004. Together with its favourable geographical location in Central Europe and the large availability of industrial land, this contributed to make the Slovak Republic one of the most sought-after investment destinations in Central and Eastern Europe (Gress, 2019).

Improving public finances and stabilising the economy laid the ground for important structural reforms Public debt quickly jumped in the first few years after independence in 1993 as the Slovak Republic struggled to establish an efficient administration for the new state and recorded successive years of high budget deficits. In 2000, the Slovak Republic had the largest public budget deficit among the countries that form the Visegrád group. Gross public debt was also among the highest in the region (Figure 13, Panel A and Panel B).

At the same time, Slovak consumers and enterprises increasingly demanded more product variety and quality. Most consumption and investment goods could not be supplied domestically. Imports grew much faster than exports, leading to a significant current account deficit (Figure 13, Panel C). External debt built up rapidly. The state, domestic banks and enterprises increasingly borrowed abroad (OECD, 1999). The Slovak Republic’s credit rating was downgraded, external financing became progressively more difficult to obtain, foreign exchange reserves fell and the Slovak koruna depreciated, adding further difficulties for banks, companies and the public sector, who held and issued foreign currency debt. Adding to the macroeconomic imbalances, inflation rose quickly in the early 1990s (OECD, 1994; OECD, 1999).

Investor confidence was low and FDI inflows were small compared to other transition economies (Mikloš, 2008; OECD, 1994; OECD, 1996; OECD, 1999). Investors had concerns over political and macroeconomic stability, as well as the perceived lack of transparency, consistency and predictability of investment-related regulations (OECD, 1999).

AMBITIOUS REFORMS BOOSTED THE CONVERGENCE PATH | 19

Figure 13. Substantial efforts were made to stabilise the public finances and reduce external imbalances As percentage of GDP A. General government budget balance A General government budget balance SVK

CZE

HUN

POL

4 2 0 -2 -4 -6 -8 -10 -12 -14 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

B.B. Gross Grosspublic publicdebt debt SVK

CZE

HUN

POL

90 80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

C.C. Current balance Currentaccount account balance SVK

CZE

HUN

POL

6 4 2 0 -2 -4 -6 -8 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: OECD Economic Outlook: Statistics and Projections database.

20 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 14. Public expenditures decreased faster than revenues until the global financial crisis As percentage of GDP A. Public expenditures

B. Public revenues SVK

CZE

HUN

POL

55

55

50

50

45

45

40

40

35

35

30

30 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: OECD National Accounts at a Glance database.

To curb the public deficit and public debt, the government implemented several reforms during the 2000s. For example, the Slovak Republic adhered to the European System of National and Regional Accounts, which enhanced transparency of the public finances. In addition, a new treasury system was implemented to manage all government’s receipts and payments, with financial controllers appointed in each ministry. An independent Debt and Liquidity Management Agency was created to deal with the bad debt of public institutions. Government-guaranteed credit schemes were abolished to lower contingent public liabilities. These measures brought budgetary procedures more in line with the OECD recommended standards (OECD, 1999).

Together with a much tighter fiscal stance, as recommended by successive OECD Economic Surveys (OECD, 1994; OECD, 1996; OECD, 1999; OECD, 2002; OECD, 2004; OECD, 2005), these measures resulted in a substantial fall in public expenditures between 2000 and 2008 (Figure 14). The European Union accession process and efforts to meet the Maastricht criteria also served as effective frameworks for greater fiscal responsibility in the early 2000s.

Increasing fiscal decentralisation, as recommended in the 1999 and 2002 OECD Economic Surveys, and in particular changing the financing system so that sub-national governments would not be exclusively dependent on transfers from the central government, improved regions’ and cities’ effectiveness in budget planning. By allowing them to exploit their own sources of revenues, such as property taxes, local user fees and privatisation of publicly-owned assets, the new system stabilised the flow of revenues to sub-national authorities, giving them an opportunity to engage in multipleyear financial planning and more independence in funding regional development projects (OECD, 2005).

At the same time, the fiscal decentralisation process was adapted to make sure that regions and municipalities would not jeopardise the fiscal consolidation efforts of the central government. For example, to prevent debt accumulation at lower levels of the government and in line with the 2004 and 2005 OECD Economic Survey recommendations, municipalities and regional governments were prevented from issuing loan guarantees and the authority of the Supreme Audit Office was extended to sub-central government accounts.

Renewed efforts to stabilise the public finances took place after the global financial crisis. To avoid politically motivated changes in fiscal policy, the fiscal framework was substantially improved with the establishment of an independent Fiscal Council (“Council for Budget Responsibility”) in 2012 and the introduction of a national debt rule,

AMBITIOUS REFORMS BOOSTED THE CONVERGENCE PATH | 21

as recommended in the 2009, 2010 and 2012 OECD Economic Surveys. Two additional independent bodies were created to increase budget transparency and objectivity: the Macroeconomic Forecasting Committee and the Tax Revenue Forecasting Committee. In 2017, the Ministry of Finance established a Value for Money unit to identify unnecessary public expenditures and conduct regular cost-benefit analyses. Such best-practice advances were extremely important in the pursuit of long-term sustainability.

The framework for monetary policy was also progressively modified with the objective to lower inflation, its volatility and ultimately joining the euro area in 2009. First, by joining the European Exchange Rate Mechanism in 2005, currency fluctuations became less frequent, which helped to stabilise prices. Importantly, the principal mandate of the central bank became medium-term price stability, instead of currency stability. The central bank was also granted full independence, and monetary financing of the government deficit was forbidden. Price stability played a significant role in boosting investments. Accession to the euro area in 2009 was also beneficial as it increased market confidence and helped keep financial conditions relatively favourable (OECD, 2010).

With inflation falling and public finances improving during the 2000s, the Central Bank started to ease monetary conditions. Monetary policy had been particularly tight after the independence in an attempt to control inflation.

More favourable monetary conditions, as well as the improved international credibility of the central bank and the government, contributed to the decline in long-term interest rates, incentivising investment (OECD, 2002; Figure 15).

Figure 15. The long-term interest rate fell sharply in the early 2000s In %

Slovak Republic

Euro area

9 8 7 6 5 4 3 2 1 0 -1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: OECD Main Economic Indicators: Finance database.

In complying with the OECD Code of Liberalisation of Capital Movements, several measures were implemented to progressively open the capital account in the early 2000s, such as removing limits on the import and export of cash and liberalising loans from non-residents above a certain maturity (OECD, 1999). The capital account liberalisation was perceived as a commitment to stable economic policy and also increased the Slovak Republic’s attractiveness as an investment destination.

22 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 16. Inflation fell and became more stable over time Consumer price index, harmonised, annual growth rate Slovak Republic

Euro area

14 12 10 8 6 4 2 0 -2 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: OECD Economic Outlook: Statistics and Projections database.

Privatisations of state-owned enterprises contributed to lower public debt and generated opportunities for private foreign investors The privatisation process after independence was particularly slow in the Slovak Republic compared with other transition economies. As a result, the scope of opportunities for the participation of foreign investors remained limited.

This partly explains the lower level of FDI in the Slovak Republic, compared to neighbouring countries, at the time.

In addition, by allowing payment arrears to publicly-owned firms, the government often sustained unviable public companies, harming competition.

An important wave of privatisations took place in the early 2000s, as recommended in the 1999 OECD Economic Survey.

The government privatised several state-owned enterprises (SOEs) in telecommunications, energy generation and distribution, as well as banking. As a result, in 2005, the Slovak Republic became the Central and Eastern European country with the lowest level of assets belonging to SOEs as a share of GDP (IMF, 2019a).

The benefits from privatisations were manifold. Part of the revenues were used to directly reduce public debt, as recommended in the 2002 OECD Economic Survey. In addition, privatisations allowed further opportunities for foreigners to invest in the Slovak economy. With a stabilised economic environment, renewed confidence in public institutions and plenty of investment opportunities, the ground was laid for other structural reforms that would attract sizeable inflows of FDI.

The financial sector became more efficient with the restructuring and privatisation of state-owned banks, channelling financial resources towards private investors After independence, the Slovak financial sector, dominated by large state-controlled banks, was not functioning effectively.

The banks’ deposit base was insufficient to meet the non-financial private sector’s credit needs. Several operational inefficiencies of state-owned banks contributed to hold back credit to the private sector: i) political interference in bank lending decisions, with public firms being favoured; ii) inadequate bank supervision that led to an accumulation of bad loans; and iii) a weak bankruptcy framework that made it difficult for banks to resolve bad loans (OECD, 2002).

AMBITIOUS REFORMS BOOSTED THE CONVERGENCE PATH | 23

Financially strapped enterprises, unable to borrow from banks, were increasingly incapable of paying their domestic suppliers, taxes and social security contributions on time, compromising the financial health of other firms and the public finances (OECD, 1999). As a consequence, in the early 2000s, state-owned banks faced a substantial burden of bad debt and urgently needed to be restructured and recapitalised. Operating profits were almost entirely devoted to building provisions against bad debt.

In line with OECD advice, after restructuring the balance sheets, the three major state-owned banks were sold to private investors, mostly from Austria, Germany and Italy, drawing-in capital and expertise (OECD, 1996; OECD, 1999).

The banking sector transformed from being dominated by the government to one in which foreign investors played a SVK CZE HUN POL SVK CZE HUN POL leading role. Although bank concentration remained broadly unaffected, the range of services offered in the banking sector increased and overall bank profitability went up (OECD, 2004).

Several aspects of banking regulation and supervision improved and were brought closer to the Basel Core principles.

Privatisations and reinforced supervision helped lower the share of non-performing loans (NPLs) and increase the overall capital adequacy ratio, improving the stability and resilience of the Slovak financial system (Figure 17).

Figure 17. The banking sector became more resilient A. Share of Non-Performing Loans

B. Capital adequacy SVK

CZE

HUN

POL 25

35 30

20 25 15

20 15

10

10 5 5 0

0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Note: The indicator shown in panel A represents the non-performing loans to total gross loans ratio, while the indicator shown in panel B represents the regulatory capital to risk-weighted assets ratio.

Source: IMF Financial Soundness Indicators.

Overall, the development of financial institutions improved remarkably over time, in particular the efficiency of commercial banks (Figure 18). An increasing amount of credit was channelled to private non-financial corporations to finance investment and support the economic expansion (Figure 19). The entry of foreign expertise into the Slovak Republic’s banking sector has encouraged innovation, improved corporate governance and introduced more sophisticated risk-management techniques (OECD, 2002). Capital markets, however, still remain underdeveloped (discussed in Part 3).

24 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 18. Banks became more accessible and efficient Financial Institutions Development Index components A. Access

B. Depth SVK

0.70

CZE

C. Effciency HUN

POL 0.90

0.40

0.85 0.60

0.80

0.35

0.75 0.50

0.70

0.30

0.65 0.40

0.60

0.25

0.55 0.30

0.50

0.20

0.45

2016

2014

2012

2010

2008

2006

2000

2016

2014

2012

2010

2008

2006

2004

2002

2000

2016

2014

2012

2010

2008

2006

2004

2002

2000

2004

0.40

0.15

2002

0.20

Note: The Financial Institutions Development Index summarises how developed financial institutions are in terms of access (ability of individuals and companies to access financial services), depth (size and liquidity) and efficiency (ability of institutions to provide financial services at low cost and with sustainable revenues and level of activity of capital markets).

Source: IMF Financial Institutions Development Index database.

Figure 19. More financial resources have been redirected to the private sector B. Firms using banks to finance investments %

A. Slovak banks' credit As % of GDP Credit to government and state-owned enterprises Domestic credit to private sector

2002

2005

2009

2013

50

70

60

40 50

30

40

30

20

20

10 10

0

0 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: World Bank Global Financial Development database, October 2019 version.

SVK

HUN

POL

CZE

AMBITIOUS REFORMS BOOSTED THE CONVERGENCE PATH | 25

The business environment improved, helping to attract investors and create jobs The quality of the business environment in the early 2000s – judged by its degree of openness to competition and entrepreneurship, the protection of property rights and its vulnerability to corruption and fraudulent expropriation – was clearly lagging behind that of comparable small open economies in the OECD. Complaints from the business community concerned the instability and ambiguity of the legislation, the poor and slow law enforcement, including for the registration of enterprises, and corruption (OECD, 2004). The government responded to the challenge by launching a series of structural reforms, mostly aiming at improving the legal environment.

The reforms of the business environment translated into significant improvements over time in the OECD Product Market Regulation (PMR) indicator (Figure 20) and the World Economic Forum Competitiveness Index. In the areas of taxation, business registration and procedures, as well as foreign ownership, the Slovak Republic went from ranking close to the bottom of OECD countries to ranking in the top half or even the top 20% in the World Economic Forum Competitiveness Index already in 2004 (OECD, 2005). From 2008 to 2013, the Slovak Republic was among five OECD countries that made the greatest progress in reducing overall regulatory restrictiveness, in particular regarding barriers to entrepreneurship (OECD, 2014).

In line with recommendations from the OECD 1999 Economic Survey, the government adopted a new law on bankruptcy in 2002, which strengthened creditors’ rights and facilitated the restructuring of businesses. Faster procedures to register new companies and to declare properties in the land registry were also implemented in 2004, as recommended in the 2002 OECD Economic Survey. Thanks to these changes in business registry procedures, the number of pending registration cases dropped dramatically and the number of new applications per month increased significantly (OECD, 2005).

To reduce barriers to entry, as recommended in the OECD 2002 Economic Survey, a new Act on Advocacy was implemented to relax barriers to entry for foreign lawyers, remove restrictions on lawyers forming certain types of business associations and merge the professions of attorney and commercial lawyer. This significantly reduced the costs of legal services, contributing to promote economic activity (OECD, 2005).

Figure 20. Product market regulation became less strict over time Product market regulation indicator from 1 (least restrictive) to 6 (most restrictive) Slovak Republic

OECD

2.5

2.0

1.5

1.0

0.5

0.0

2003

2008

2013

20181

1. The indicator values from 1998 to 2013 are comparable, however the methodology considerably changed in 2018 and past vintages cannot be compared with the 2018 PMR indicators.

Source: OECD Product Market Regulation database.

26 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 21. Improvements in the business environment have slowed recently World Bank Ease of Doing Business Indicator for the Slovak Republic, rank 60 Rank deterioration 50

40

30

20

10 Rank improvement 0

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Note: Indicator values from 2015 to 2019, those for 2014 and those from 2009 to 2013 are based on different methodologies (DB17-20 methodology, DB15 methodology and DB10-14 methodology, respectively) and thus are not fully comparable. Rank out of 183 countries in 2009-2011, 185 in 2012, 189 in 2013-2015, and 190 in 2016-2019.

Source: World Bank Doing Business database.

More measures were introduced in the last decade to improve the business environment, in line with OECD recommendations to continue reducing bureaucratic costs and strengthening competition (OECD, 2005; OECD, 2007; OECD, 2009; OECD, 2010). In 2014, for example, the government created one-stop shops to register new businesses, merging four administrative procedures in one. These one-stop shops also centralised application procedures for trading licenses, income tax and health insurance registration, significantly reducing administrative costs. Trading across borders also became easier with the introduction of an electronic system for customs administration in 2016.

Later, in 2018, several amendments were introduced to the civil code to speed up contract enforcement procedures and a new legal form of firm was introduced to ease the creation of start-ups and allow more flexible relations among shareholders. However, compared to the early 2000s, these improvements in the business environment have been more limited and the Slovak Republic has been losing positions in the World Bank Ease of Doing Business ranking more recently (Figure 21).

The 2004 tax reform helped reduce the tax burden on investors In the early 2000s high tax rates to finance high levels of social assistance contributed to reduce incentives to work, discourage job creation and boost the underground economy and tax evasion. Corporate taxes were higher than in some neighbouring countries and the combined personal income tax and social security contributions were the highest in the OECD (OECD, 2002; Figure 22). The 2002 OECD Economic Survey recommended to lower corporate taxes and social security contributions to encourage investment and job creation.

With the objective of strengthening work incentives, boosting employment creation, simplifying the system to reduce tax evasion, and sending positive signals to investors, the 2004 tax reform introduced a single flat personal income tax, corporate income tax and value-added tax (VAT) rate of 19% (Remeta et al., 2015; OECD, 2004). Several other taxes on capital were also eliminated, namely the dividend tax, the gift tax, the inheritance tax and the real estate transfer tax. Social security contribution rates were lowered in 2005, however they remained high compared with the OECD average, especially for employers (Remeta et al., 2015; Figure 22, Panel A). The corporate income tax rate was brought significantly below the OECD average at the time, making the Slovak Republic an attractive investment destination (Figure 22, Panel B). Lower capital taxes led to a continuous decline in tax revenues as a share of GDP until the GFC (Figure 22, Panel C).

AMBITIOUS REFORMS BOOSTED THE CONVERGENCE PATH | 27

Figure 22. The tax burden was lowered, but social security contributions remain high B. Corporate income tax rate %

A. Average rate of employer and employee’s social security contributions.

Single person at 100% of average earnings, no child, % gross wage earnings SVK

CZE

HUN

POL

OECD

OECD: 25th to 75th percentile area

40

40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

C. Tax revenues as % of GDP Slovak Republic

OECD average

40

37

34

31

28

25 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: OECD Taxation database..

The 2012-14 tax reforms aimed at addressing some of the weaknesses of the 2004 reform such as the loss in tax revenues and reduced fairness of the tax system. The corporate income tax rate was increased again from 19% to 22% and a minimum corporate income tax was introduced. The government also adopted many measures to counter VAT evasion and raise the efficiency of VAT collection, as recommended in successive OECD Economic Surveys (OECD, 2004; OECD, 2010; OECD, 2012). As a result, the VAT effective tax rate increased significantly starting from 2013 (Remeta et al., 2015).

Changes were also introduced to labour taxes to increase the progressivity of the system while lowering the costs of hiring low-skilled workers. A second personal income tax bracket and tax rate of 25% were introduced. At the same time, a social security contribution exemption was introduced for the previously long-term unemployed for the first 12 months of re-employment. The government also increased the social security contribution base of self-employed workers and extended mandatory contributions to atypical employment contracts. These changes were important to reduce distortions between different types of labour arrangements and increase incentives for hiring on regular employment contracts, improving labour market inclusiveness to some extent.

28 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Labour market reforms reduced disincentives to work In the early stages of the transition, the overall pace of growth was insufficient to create an adequate number of jobs for the expanding labour force, as well as to compensate for the massive job losses associated with economic transformation and corporate restructuring. The unemployment rate reached almost 20% in 2001 (OECD, 2002; see Figure 8). The generosity of unemployment and welfare benefits, which had no time limit and were not conditional on job-search activities, reduced incentives to work. At the same time, high social security contributions led to a high labour tax wedge, in particular for low-wage earners, further reducing incentives to work. Wages were difficult to adjust as collective agreements were centrally determined. Employment protection was high, including detailed and lengthy procedures to dismiss workers, often discouraging employers from hiring new workers (OECD, 2002).

The Slovak authorities implemented several structural changes to labour market institutions and regulation that increased wage and employment flexibility. The new labour code, introduced in the early 2000s, eased conditions in which workers could be laid off, favouring job creation and job reallocation towards growing firms and sectors. Net employment creation picked up in the private sector between 2002 and 2005 (OECD, 2005). As mentioned above and recommended in the 2002 OECD Economic Survey, social security contribution rates were reduced in early 2005 to lower disincentives to work (Figure 22, Panel A). In addition, extensions of collective agreements to firms not involved in the negotiations were banned in 2004, allowing more flexibility in wage determination for small and medium firms.

The minimum wage fell substantially in the late 1990s and, compared to the median wage, has remained below most of the Slovak Republic’s neighbouring countries since then (Figure 23). Working hours were deregulated and overtime no longer required a special authorisation by the National Labour Office. All these measures contributed to lowering labour costs, making the Slovak Republic an attractive destination for FDI, especially for labour-intensive activities.

Figure 23. The minimum wage fell significantly in the 1990s and has remained below most neighbouring countries Minimum relative to the median wage of full-time workers Ratio 0.7

SVK

CZE

HUN

POL

SVN

0.6

0.5

0.4

0.3

0.2

0.1

0 1991

1993

1995

Source: OECD Earnings database.

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

REFORMS MUST CONTINUE | 29

With the 2008 financial crisis and the consequent rise in unemployment, more flexibility was introduced in 200910. The government introduced a flexible working time scheme to prevent further job destruction. To promote job creation, notice period and severance payments for regular contracts were lowered and the dismissal procedure was simplified, in line with recommendations in the 2007 OECD Economic Survey. Consequently, the OECD Employment Protection Legislation Index fell significantly after 2011 (Figure 24).

Changes in the unemployment benefit system towards tighter eligibility criteria and shorter entitlement periods have also helped to lower disincentives to work. The unemployment protection system in the 1990s was characterised by broad coverage, long entitlement periods and loose criteria to obtain unemployment benefits (Domonkos, 2016). Successive reforms, since the 2000s, aimed at cutting the entitlement period and tighten the eligibility criteria. In line with OECD recommendations in the 2002, 2005 and 2007 Economic Surveys, jobseekers were also required to provide written evidence that they had established contact with prospective employers and demonstrate active search for employment.

The trend in the social assistance system was similar: several reforms led to a gradual decline in the generosity of the minimum income support. Social assistance became increasingly conditional upon participation in active labour market policies. The government introduced an in-work benefit in 2009, as recommended in the 2007 OECD Economic Survey. As of 2014, the application of punitive measures for individuals refusing job offers became stricter (Domonkos, 2016). These measures significantly contributed to lower disincentives to work, helping to boost employment and labour force participation (Figure 8). At the same time, these flexibility-enhancing reforms seemed not to have come at the expense of labour market inclusiveness (Figures 11 and 12).

Figure 24. Labour market regulation became more flexible 2008

Strict regulation

2014

2019

3.5 3.0 2.5 2.0 1.5 1.0 0.5

Flexible regulation

0.0

Slovak Republic

OECD countries

Note: Indicator of strictness of employment protection against individual and collective dismissals for workers with a regular contract is the weighted sum of sub-indicators concerning the regulations for individual dismissals (weight of 5/7) and additional provisions for collective dismissals (2/7). It incorporates 13 detailed data items. Data range from 0 to 6 with higher scores representing stricter regulation.

Data for the OECD corresponds to the average of the EPL indicators values of OECD countries for which data are available over the 2008 - 2019 period (i.e. all OECD countries except COL, ISL, LTU and LVA, for which time coverage is limited).

Source: OECD Employment Protection Legislation database, 2020 edition.

30 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP

3. Reforms must continue The Slovak Republic needs to find new domestic drivers of growth The growth strategy adopted by the Slovak Republic faces several challenges that threaten its long-term potential.

Foreign direct investment (FDI) has been a key driver of the Slovak Republic’s growth and has contributed to substantial improvements in living standards, as discussed in the previous parts. However, returns on investment have declined and FDI inflows have slowed considerably since 2008. At the same time, cost competition in international markets increased, especially for the labour-intensive activities in which the Slovak Republic has specialised. The capacity of traditional industries to innovate remains limited, constraining the Slovak Republic’s ability to produce higher valueadded in global value chains.

The COVID-19 pandemic has hit the Slovak Republic hard as exports and investment plummeted. With uncertainty over the duration of the pandemic still high, the recovery is likely to be gradual and will depend to some extent on the speed of recovery of the Slovak Republic’s main trading partners. However, the crisis can also be an opportunity to accelerate reforms to strengthen new domestic drivers of growth.

One of the crucial challenges is to improve the quality of public services in the Slovak Republic, the efficiency of which is lagging behind other countries. Health care outcomes have not improved significantly and life expectancy at birth (77 years), for example, is three years lower than the OECD average. Education results are weak and highly dependent on socio-economic background. Better access to public services is particularly crucial for the Roma, the majority of whom live in poverty with very low educational outcomes. Moreover, tax collection, judiciary efficiency and skill levels among public employees all show room for improvement. Several environmental concerns, particularly regarding air quality, waste management and nature protection, also remain pertinent and need to be addressed.

At the same time, the Slovak population is ageing at an ever faster pace, adding to long-term challenges. Population ageing is expected to lower labour force participation and may lead to a slowdown of investment and hence the economic growth potential. Despite recent reforms, rising pension and health care costs are a risk for long-term fiscal sustainability.

Therefore, further structural reforms are needed to tackle obstacles to growth. Authorities should prioritise reform measures that bring short-term benefits to revive the economy in the aftermath of COVID-19 and facilitate a reallocation of labour and capital towards expanding sectors, while also helping to pursue long-term inclusive growth objectives.

Increasing spending on active labour market policies and strengthening employment services to foster re-training, improving access to and quality of health care and digital infrastructure especially in lagging regions, and expanding

REFORMS MUST CONTINUE | 31

high-quality early education and care facilities are examples of such win-win policies. Accommodative monetary policy in the euro area and the European Union recovery plan for 2021-27 will provide a supportive environment in which to advance further structural reforms.

The productivity of domestic firms is still lagging behind Spillovers from multinationals to domestic firms in the last 20 years have only been limited. OECD research shows that there is a significant productivity gap between foreign-owned firms in the Slovak Republic and domestic firms, suggesting that local firms have not reaped the full benefits emanating from foreign presence (Machlica and Brandt, 2018). The impressive productivity growth described in the first part has been mostly concentrated in the manufacturing sector, especially where multinationals are present. The productivity gap in the services sectors, compared with some peer countries for example, remains high (Figure 25).

Figure 25. Productivity gains have been modest in the services sectors Gross value added per hour worked, constant prices B. Business services1

A. Manufacturing SVK

CZE

HUN

POL

SVN 250

800 700

200

600 500

150

400 300 200

100

100 50

0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

1. Excluding real estate.

Source: OECD Productivity database.

One of the reasons why the presence of multinationals may not have generated high spillovers to domestic firms and other sectors of activities is that, as mentioned above, foreign investments have been concentrated in the assembly of car and electronic components imported from abroad, adding little domestic value to Slovak’s exports (Figure 26). Such activities, although they created many jobs and boosted exports, require little knowledge capital and only a few local services and interactions.

The Slovak Republic became highly specialised and efficient in these very specific areas of manufacturing. Consequently, the export structure has become increasingly concentrated. The top four export products account for more than 80% of total exports. Export destinations are also limited, mostly to Germany and the Czech Republic (IMF, 2019b). The Slovak economy therefore remains vulnerable to changes in the international environment, and the labour market is highly exposed to cyclical fluctuations among its trading partners (Figure 27). This has been particularly evident during the global financial crisis, the European sovereign debt crisis and, more recently, the COVID-19 economic crisis.

The 2019 OECD Survey, recommended several policies to improve the positioning of the Slovak Republic in global value chains and promote the diversification of the economy, in particular by strengthening the services sector and improving the transport infrastructure to increase connections between players in production chains (Table 1).

32 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 26. Domestic value added embodied in exports is still low Domestic value added embodied in gross exports, % of gross exports, 2016 100 90 80 70 60 50 40 30 20

JPN

AUS

USA

LUX

CHL

SVK

IRL

NZL

EST

CZE

GBR

BEL

NOR

ISR

TUR

ISL

SVN

SWE

LVA

HUN

ISL

DEU

LTU

CHE

LVA

CAN

GRC

ITA

ESP

FRA

FIN

CHE

POL

AUT

NLD

PRT

LTU

DNK

SVN

KOR

EST

BEL

MEX

IRL

CZE

HUN

LUX

0

SVK

10

Source: OECD Trade in Value Added (TiVA) database.

Figure 27. Employment is vulnerable to the international environment Share of domestic employment embodied in foreign final demand, % 2015

2005

60 50 40 30 20

AUT

POL

NLD

DNK

PRT

DEU

KOR

SWE

FIN

NZL

ESP

ITA

CHL

GRC

NOR

GBR

FRA

TUR

CAN

ISR

AUS

MEX

JPN

0

USA

10

Source: OECD Structural Analysis (STAN) database.

Table 1. OECD recommendations to strengthen services and transport infrastructures Lower licensing restrictions for legal services, architects and engineers Further reduce the administrative burdens on enterprises by developing e-government, especially services to businesses, and adopt a “silence is consent” rule for administrative procedures, as and when appropriate Create an independent agency to monitor the quality of the selection process for transport infrastructure projects Introduce systematic publication of cost-benefit analyses of transport projects with mandatory justification of policy-makers’ choices Focus maintenance for railways networks on the lines with a potential for development; privatise some local routes and sell underutilised infrastructure; enhance liaison and coordination between railways and other modes of transport (coaches, urban public transport or private cars) Create a single entity in charge of the management of motorways and first class roads Note: Recommendations are from the 2019 OECD Economic Survey.

REFORMS MUST CONTINUE | 33

Encouraging more R&D to develop a knowledge society To sustain convergence, the Slovak Republic should boost its long-term growth potential, placing more emphasis on innovation and the accumulation of knowledge-based capital as key drivers of economic performance. Orienting the industry structure towards knowledge-intensive goods and services would create opportunities for the Slovak Republic to climb up the global value chain. A higher domestic content in exports would improve knowledge spillovers from foreign-owned to domestic firms and help to achieve a more even distribution of benefits across the country. This could boost productivity growth and lower the economy’s dependence on the external sector, as argued in the 2019 OECD Survey (Table 2).

Spending on research and development (R&D) has been low by international standards (OECD, 2019a). Substantial benefits could be obtained by raising and better designing public support for R&D (Figure 28; OECD, 2014). Ties between the industry and the academic sector are relatively weak, implying that research is not often applied in the business

Figure 28. Public support to business R&D is insufficient A. Public support to R&D 2017 Government-financed business enterprise R&D expenditure (BERD) Indirect government support through R&D tax incentives 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10

FRA

BEL

GBR

KOR

ISL

AUT

IRL

NOR DEU

HUN

USA

ITA

CAN

SVN

NLD

JPN

AUS

PRT

CZE

SWE

ISR

USA

TUR

NZL

ESP

POL

DEU

DNK

FIN

EST

LUX

LTU

CHL

CHE

GRC

SVK

MEX

LVA

0.00

COL

0.05

B. Expenditure on R&D in the business sector 2018 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0

Source: OECD Science, Technology and Patents database.

ISR

KOR

JPN

SWE

AUT

BEL

DNK

FIN

OECD

NLD

SVN

FRA

ISL

CZE

GBR

NOR

HUN

ITA

IRL

POL

ESP

CAN

PRT

LUX

EST

GRC

LTU

SVK

LVA

0.0

MEX

0.5

34 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Table 2. OECD recommendations to boost innovation and knowledge-based capital Include research collaboration with innovative companies in the assessment of universities and public research institutions (2019 Survey) Create larger, internationally visible research units and reorient higher education institutions research funding to foster research at high international standards (2019 Survey) Carefully monitor the implementation of the more generous R&D tax incentives recently adopted (2019 Survey) Consider providing direct support for centre of competence to strengthen public-private collaboration for research and innovation in areas such as the automotive industry (2019 Survey) Provide technical assistance to regional authorities to develop their capacities and involvement in assessing and steering innovation policies at the regional level (2014 Survey)

sphere and that academics tend to be disconnected from market needs. The number of researchers is low in the Slovak Republic compared with other OECD countries (OECD, 2010). Moreover, highly educated professionals in the ICT area often emigrate, as labour market opportunities are still limited in the Slovak Republic.

The Slovak Republic also needs policies to boost the development of capital markets to improve access to finance and the allocation of resources to firms and sectors with high-growth potential (Figure 29). Young, innovative and domestic firms often have more difficulty accessing financing in a bank-based financial system, because they have limited internal funds or collateral and do not have a proven track record. OECD research has shown that market-based financing is more favourable to growth than bank-based financing (Cournède, Denk and Hoeller, 2015; Cournède and Denk, 2015). Further progress with the Capital Markets Union on the European level could help boost capital market development in the Slovak Republic.

Figure 29. Capital markets remain underdeveloped Financial Markets Development Index, 0 (Non-developed) - 1 (Fully developed) A. Financial Markets Development Index 0 (Non-developed) – 1 (Fully developed)

B. Stock market capitalization to GDP %

SVK

CZE

HUN

POL 50

0.7

45 0.6 40 0.5

35 30

0.4

25 0.3

20 15

0.2

10 0.1

5 0

0.0 2000

2002 2004 2006 2008

2010

2012 2014

2016

1998

2000

2002

2004

2006

Source: IMF Financial Development Index database; and World Bank Global Financial Development dataset, October 2019 version.

2008

2010

2012

REFORMS MUST CONTINUE | 35

Regional disparities, long-term unemployment and social exclusion of Roma remain obstacles to more inclusive growth FDI, productivity growth and economic development have been concentrated in a few regions. Regional disparities partly originate from the location of industries during socialist times, but the distribution of foreign investment since 2000 has exacerbated regional inequality. FDI-fuelled growth has created a highly productive and predominantly foreignowned manufacturing sector centred in Bratislava. Consequently, the region of Bratislava enjoys much higher disposable income per household and lower unemployment rates than the East of the Slovak Republic (Figure 30, Panel A and B; World Bank, 2019). In recent years, these gaps have been widening rapidly. The Slovak Republic has the highest regional disparities in disposable income per capita among European OECD countries (OECD, 2018b).

Regional disparities in incomes, coupled with a high homeownership rate and little tradition in housing rental, make it difficult for an unemployed person to relocate and find affordable housing in a city where jobs are more plentiful, threatening the efficient functioning of labour markets. This aggravates disparities in terms of long-term unemployment and social exclusion. Several OECD Surveys have highlighted the problem and recommended policies to address regional inequality and long-term unemployment, namely housing policies to improve labour mobility and reforms to increase the capacity of regional public employment services. The OECD has also long advocated for the property tax base to be the market value of properties, which would increase regional and municipal government revenues and increase their capacity for local service delivery (Table 3; OECD 2014, 2009, 2007, 2005 and 1996).

Figure 30. Regional disparities remain high B. Unemployment rate 15 years old and over, % of labour force

A. Household disposable income, per household Constant prices, Euro Slovak Republic

Bratislava Region

East Slovakia

25 000

30

25

20 000

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5

0

0 2000 2002 2004 2006

2008 2010

2012 2014 2016

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Source: OECD Regions and Cities database; and OECD Labour Force Statistics database.

Roma are particularly isolated in regions that lag behind, increasing their risk of falling into poverty (Figure 31). They live mostly excluded from the general population in segregated settlements that typically lack access to standard utilities (OECD, 2019a). The ethnic minority, which accounts for almost one-tenth of the population, is thought to account for about 25% of all unemployed, more than 30% of those unemployed for more than one year and about 50% of those unemployed longer than two years (OECD, 2004; OECD, 2019a). One third of Roma are illiterate, half of them drop out of school and only a few reach tertiary education (OECD, 2019a). Many Roma children do not attend kindergarten (OECD, 2007). The successful integration of Roma is fundamental to create a more inclusive society and help mitigate the effects of rapid ageing on public finances, as argued in the 2019 OECD Survey.

36 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 31. Most of the Roma population is at risk of poverty Per cent

Overall population

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Notes: At-risk-of-poverty rate (below 60 % of median equivalised income after social transfers) of Roma, compared with the rate of the general population in 2014 (EUSILC) (published by Eurostat). The equivalised disposable income is the total income of a household, after tax and other deductions, divided by the number of household members converted into equalised adults.

Source: EU (2016), Second European Union Minorities and Discrimination Survey, Roma – Selected findings, European Union, Agency for Fundamental Rights.

Table 3. OECD recommendations to improve inclusiveness Phase out financial incentives for homeownership (2017 Survey) Develop long-term rental contracts better protecting landlords’ rights, while ensuring stability and predictability for tenants (2017 Survey) Provide the poorer regions with a higher share of EU funds and a stronger role in the design of programmes (2014 Survey) Reallocate resources across public employment services offices according to local unemployment rates (2014 Survey) Scale up successful EU-funded pilot programmes, such as community centres and health mediators for the Roma, and ensure sustained financing through the national budget (2019 Survey) Continue to expand the provision of high-quality early education and care, engage with parents to advertise its benefits and remove financial barriers to attendance (2019 Survey) Involve Roma in the development and operation of integrated health, education and employment services (2019 Survey) Give the office of the Plenipotentiary a bigger role in coordinating national policies and ensuring integrated provision of public services to Roma (2019 Survey) Increase the number of teaching assistants speaking Roma, and provide Slovak language support for Roma children (2019 Survey) Strengthen public investment in basic infrastructure in Roma settlements (2019 Survey) Provide funding for vaccination programmes, regular disinfection and rat examination programmes in Roma settlements (2019 Survey) Provide support to formalise Roma property rights, including legal, financial and technical support to municipalities and Roma households (2019 Survey) Provide school teachers working with vulnerable students easily implementable international best practice examples of teaching these students (Skills Strategy 2020) Strengthen co-operation and communication between schools, vulnerable students’ families and social services (Skills Strategy 2020)

100

REFORMS MUST CONTINUE | 37

Raising public sector efficiency to improve the business environment Further structural reforms are needed to simultaneously support the development of a knowledge-based economy and increase the Slovak Republic’s capacity to adopt new technologies and work methods. A business-friendly environment, an efficient public sector and reliable infrastructure are foundations of innovative economies. In addition, subsidiaries of multinationals have easier and direct access to the critical resources for their development, such as technology, digital infrastructure and legal protection. Smaller domestic firms, on the other hand, need to rely more heavily on the domestic legal and infrastructural framework. They are therefore more vulnerable to failures in rule enforcement, corruption and favouritism in the judiciary system (OECD, 2004). Policies that improve business regulations, the quality of public institutions and public services and that promote an efficient judicial system are of high importance to reap the full benefits of the presence of multinational enterprises.

While a lot of progress was made to improve business regulations, as discussed in Part 2, progress has slowed in recent years (Figure 21). In addition, the positive impact of more business-friendly regulations strongly depends on the quality of enforcement, and hence the competencies of the public administration in charge of enforcing them, and the efficiency of the judicial system. The Slovak judicial system is slow, especially when it comes to the enforcement of cases. It is costly for companies to protect themselves against default on contracts or violation of intellectual property rights (OECD, 2019a). Laws defining and sanctioning corruption also need to be more strictly enforced.

More can be done to improve the efficiency of the public sector in other areas. In fact, the quality of public services remains relatively low. This is particularly striking in the education and health care sectors, as discussed below. Public investment has been lower than that of peer countries (OECD, 2014). In addition, the Slovak Republic could modernise its public administration. Performance measurement is still undeveloped and the public sector lags in the application of e-government and e-procurement (OECD, 2014).

Table 4. OECD recommendations to improve public sector efficiency Strengthen the Value for Money initiative, use the results to develop concrete proposals for efficiency improvements and integrate them in medium-term fiscal planning (2019 Survey) Encourage joint public-service delivery for small municipalities, and strengthen the revenue-raising power and spending responsibility of local governments (2014 Survey) Use performance budgeting and e-government to modernise management; And train more staff in computer and internet skills (2014 Survey) Accelerate the handling of insolvency procedures (2019 Survey) Continue to work with the ongoing Council of Europe project on judicial reforms, and implement its suggestion (2019 Survey) Further improve the administrative capacity to mobilise EU structural funds thanks to greater transparency in project selection and public procurements (2019 Survey) Develop a plan for more effective use of data on irregularities and public procurement (Tackling fraud and corruption in the Slovak Republic, 2019) Organise information-sharing forums between authorities responsible for managing European Structural Investment Funds and key national authorities, including law enforcement authorities and the Anti-Monopoly Office (Tackling fraud and corruption in the Slovak Republic, 2019) Adopt a government-wide strategy on reforming inspections and a more robust risk-based approach to enforcement (Regulatory policy in the Slovak Republic, 2020) Conduct pilot studies for ex post evaluation in critical sectors to test the effectiveness of newly developed regulation. Formulate comprehensive and clear guides and methodologies for different types of ex post evaluations to provide civil servants with the analytical support needed for conducting the evaluations (Regulatory policy in the Slovak Republic, 2020)

38 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

The use of EU funds is a great opportunity for the development of digital infrastructure. Nevertheless, the Slovak Republic has been lagging behind in the absorption of these funds compared to other Central and Eastern European countries (OECD, 2010). Low quality and lack of transparency in the Slovak selection procedures have led to projects not passing audits or other control mechanisms. Improving the absorption of EU funds should be a priority going forward, as already advocated in the 2010 OECD Survey.

Improving education and training to supply the skills demanded in the labour market Innovation also depends on people who have the knowledge and skills to generate new ideas and technologies, bring them to the market and implement them in the workplace. However, in the Slovak Republic, student performance in secondary schools is low when compared with other OECD countries (Figure 32). Slovak universities do not rank well in international comparison and the share of students graduating from tertiary education remains below the OECD average, despite substantial improvements in the last 20 years (OECD, 2019a).

Figure 32. Students’ education outcomes are weak Average of mean score in science, reading and mathematics 510

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Source: OECD (2019), PISA 2018 Results (Volume I-III), OECD Publishing, Paris.

Teacher salaries are lower than in other OECD countries and the teaching career is little attractive, making it difficult to hire qualified teachers and improve the quality of public institutions (Figure 33). Spending on education is low by international standards and relatively inefficient (Figure 34). The 2017 and 2012 OECD Surveys provided comprehensive reviews of the public school system, with several recommendations to improve the efficiency of public spending in education (Table 5). Authorities have made some progress in recent years – particularly in tertiary education – by allocating funding to universities based on outcomes and easing restrictions to hire foreign researchers. Nonetheless, there is still room for improvement, namely regarding working conditions and salaries for teachers and researchers.

Lack of labour-market relevant education and training opportunities, at the secondary and tertiary level, remains a problem. At the secondary level, for instance, employer involvement in the definition of vocational curricula and practical training is limited. Courses at universities have more emphasis on academic learning and offer little practical experience or investment in the development of soft skills (OECD, 2019a). As a result, skill mismatches persist (Figure 35). The government recently introduced financial incentives for employers to participate in work-based learning schemes, but take-up has been low (OECD, 2019a).

Moving up the global value chain will require a higher share of skilled workers, implying that the current labour force needs to upskill. The Slovak Republic also has a large share of low-skill routine jobs that are at risk of automation (Figure 36).

REFORMS MUST CONTINUE | 39

Figure 33. Teachers’ remuneration is low by international standards 2.5 2 1.5 1

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Source: OECD Education at a Glance database.

Figure 34. Spending on education is low and inefficient A. Spending on education Per student, relative to GDP per capita 2017 or latest available year

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80

40 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 35. Qualification and educational mismatch in the Slovak Republic is high and costly A. Mismatches among young tertiary educated graduates Less than 35-year-olds, %

B. Gains to labour productivity from reducing skill mismatch¹ % 12

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1. The figure shows the simulated gains to allocative efficiency from reducing skill mismatch in each country to the best practice level of mismatch. The figures are based on OECD calculations using OECD (2012), Survey of Adult Skills.

Source: OECD (2012), The Survey of Adult Skills (PIAAC); M. Adalet McGowan and D. Andrews (2015), “Labour market mismatch and labour productivity: Evidence from PIAAC data”, OECD Economics Department Working Paper, No. 1209, OECD Publishing, Paris.

Figure 36. The share of jobs at risk of automation is the highest in the OECD Risk of significant change (50-70%)

High risk of automation (>70%)

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Source: OECD calculations based on the Survey of Adult Skills (2012); and Nedelkoska, L. and G. Quintini (2018), “Automation, skills use and training”, OECD Social, Employment and Migration Working Papers, No. 202.

Promoting lifelong learning will be crucial to make sure those low-skilled workers in decaying industries or in automatable jobs can reallocate to other occupations, firms and sectors of activity in higher demand. Room exists to expand adult education (Figure 37; OECD, 2019a).

Active labour market policies (ALMPs), and in particular training programmes organised by public employment services, are equally important to promote the reintegration of unemployed workers in the labour market and to foster workers’ reallocation across different firms and sectors of activity. Nevertheless, as highlighted by several OECD Surveys, expenditures on ALMPs and training programmes are below the OECD average (Figure 38; OECD, 2017).

REFORMS MUST CONTINUE | 41

Figure 37. Participation in adult education should be further increased Participation in formal and non-formal education and training by 25-64-year-olds, 2016 80 70 60 50 40 30 20

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Source: OECD Education at a Glance database.

Figure 38. Spending on ALMPs is low by international standards Spending on active labour market policies per unemployed, as a % of GDP per capita, 2017 or latest available 70 60 50 40 30 20

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Note: 2015 for Italy and 2016 for New Zealand.

Source: OECD Labour Market Programmes database; and OECD National Accounts Statistics database.

Most ALMP resources are spent on employment incentives, although empirical evidence about their effectiveness is mixed. Employment incentives are often granted to firms that would hire anyway or that dismiss workers as soon as the employment subsidy expires (OECD, 2012). Programmes are often not sufficiently targeted at the most vulnerable workers and formal assessments of labour market programmes are rarely conducted. Spending on ALMPs should be increased for those programmes whose effectiveness has been demonstrated as recommended in the 2017, 2014 and 2012 OECD Surveys (Table 5).

42 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Table 5. OECD recommendations to improve the quality of education and lifelong learning Publish high-quality analysis of graduates’ labour market outcomes (2019 Survey) Increase resources devoted to tertiary education and consider concentrating them on fewer, better performing, institutions (2019 Survey) Ensure that salaries and working conditions of tertiary-level teaching staff are adequate to attract highly-qualified professionals in all fields of study (2019 Survey) Further involve businesses in higher education governance and introduce a general system of career guidance (2019 Survey) Create vocational bachelor programmes and strengthen practical experience in the higher education curriculum (2019 Survey) Increase the time spent on general and digital training in vocational education (2019 Survey) Increase spending on active labour market policies to further reduce the caseload for job counsellors, and continue to foster retraining measures in line with labour market needs (2019 Survey).

Legislate a minimum share of practical training for students teachers at universities (Skills Strategy 2020) Unify teaching standards across the system (Skills Strategy 2020) Facilitate the establishment of partnerships between pedagogical faculties and schools (Skills Strategy 2020) Introduce a one-stop-shop portal that allows students and their families to access information on labour market and skills needs and study opportunities (Skills Strategy 2020) Introduce more targeted incentives to monitor the employability of graduates in the funding structure of educational institutions (Skills Strategy 2020) Provide targeted funding and tighten regulatory requirements for career guidance centres and universities (Skills Strategy 2020) Training subsidies should be spent on approved training courses only (Skills Strategy 2020)

Disruptions in the labour market induced by the COVID-19 pandemic could leave long-lasting scars, magnifying existing challenges. Some sectors may be permanently smaller after the crisis, affected by changes in consumer preferences, changes in production chains and global value chains, a shift to remote working and the increasing use of digital technologies. Adjustment to these changes will require labour reallocation. Investments in ALMPs, including employment services to help job seekers find a job and training to create new opportunities, would help.

Improving health outcomes and raising the efficiency in the health care sector to enhance well-being for all Health outcomes, as measured before the COVID-19 crisis, were worse than in other OECD countries. Life expectancy at birth and the number of healthy years of life are lower than in countries with similar income levels, while the infant mortality rate remains above most high-income OECD countries (OECD, 2017). Cancer mortality and deaths caused by cardiovascular diseases are among the highest in the OECD, as well as preventable deaths (Figure 39 and Figure 40). The number of premature deaths due to poor air quality is high, as discussed below. Roma, in particular, have poor health outcomes (OECD, 2019a). Overall, the convergence process that occurred in the last 20 years in terms of material living standards has not been matched with similar progress in health outcomes (OECD, 2017).

International comparisons measuring the efficiency in health care systems suggest that the Slovak system has among the largest potential to improve efficiency in the EU (European Commission, 2018a). Changes to the health care system over the last 15-20 years have not led to a marked improvement in health outcomes (OECD, 2017; Filko et al., 2012).

The role of general practitioners (GPs) as gatekeepers could be strengthened to reduce waiting lists to receive specialised treatment, and avoid late treatment of cardiovascular diseases or cancer (Smatana et al., 2016). In addition, doctors have insufficient time to invest in prevention activities to avoid complications for chronically ill patients. Another issue is that the distribution of GPs across urban and rural areas is not uniform, seriously threatening access to health care services in remote areas.

REFORMS MUST CONTINUE | 43

The financial performance of hospitals continues to disappoint, with high indebtedness despite several bailouts and restructuring operations over time, as in 2004 (European Commission, 2018a). Budget constraints are insufficiently binding, there is still limited competition in the market for health care services, rules to allocate funding across hospitals and departments within hospitals lack transparency, and a diagnosis-related group payment system has only been introduced in 2017, in line with OECD recommendations (OECD, 2010; OECD, 2004).

More effective health care would have substantial benefits for people’s well-being, and also to the economy. Healthy people are more productive and stay active for longer. The Slovak Republic performs relatively worse than other OECD countries regarding healthy years of life and the ability to live long without limitations (Figure 41). Longer working lives are particularly important in light of rapid population ageing. The financing of the long-term care system is also badly prepared to cope with demand pressures expected in the coming years. The current system relies mainly on informal care for dependent people by their friends and family (OECD, 2017).

Figure 39. Deaths caused by cancer and cardiovascular diseases are among the highest in the OECD Deaths per 100 000 population (standardised rates¹), 2017 or latest available year A. Cancer 350 300 250 200 150 100

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B. Cardiovascular diseases 700 600 500 400 300 200

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1. The standardised rate takes differences in age structures into account.

Source: OECD Health Statistics database.

44 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 40. Many deaths are preventable Preventable deaths, age-sex standardised rate per 100 000 population, 2016 400 350 300 250 200 150 100

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Figure 41. Older individuals’ activity is severely limited by health problems A. Healthy life years at age 65 In years, 2017 or latest available year1 16 14 12 10 8 6 4 2 BEL

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B. Self-perceived long-standing limitations in usual activities due to health problems at age 55-64 Share of people reporting to have at least some limitations, in per cent, 2019 or latest available year 50 40 30 20 10

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1. Healthy life years are defined as the number of years spent free of activity limitation and they are calculated as the unweighted average of healthy life years at age 65 of women and men.

Source: Eurostat Healthy life years database; and Eurostat Functional and activity limitations database.

REFORMS MUST CONTINUE | 45

Table 6. OECD recommendations to increase health care efficiency Expand general practitioners’ prescription-writing authority (2017 Survey) Expand fee-for-service payments for primary-care procedures of general practitioners (2017 Survey) Restrict authorisation for doctors wishing to set up a private practice in well-served areas, and introduce financial incentives for them to move to poorly-served areas (2017 Survey) Consider introducing an adjustable price system for specialists’ fee-for-service payment with a capped budget (2017 Survey) Improve the coordination of services between providers, including through the development of poly-clinics and a more rapid implementation of electronic personal health records (2017 Survey) Promote better management of queues in out-patient services by encouraging all doctors to implement an appointment system (2017 Survey) Implement e-health and e-prescription programmes (2017 Survey) Further centralise hospital procurement, professionalise their management and decouple salaries from the national average wage (2017 Survey) Introduce performance-related pay for hospital doctors (2017 Survey) Consider a regulated opening of the long-term care market to qualified foreign workers (2017 Survey)

Addressing challenges from population ageing to safeguard fiscal sustainability and sustain growth The Slovak Republic has one of the fastest ageing populations in the OECD. The share of the working-age population could shrink to only 55% in 2060. As a consequence, economic convergence might slow and even reverse in the long term (OECD, 2017). In fact, the decreasing working age population share is already having a negative impact on potential output growth (see Figure 3). Ageing also poses a threat to fiscal sustainability as long-term ageing costs are expected to rise by about 3% of GDP from 2020 to 2060 (OECD, 2017). As such, population ageing is the key long-term challenge facing the Slovak Republic.

The effective retirement age is the lowest among the OECD and very few old-age pensioners continue to work (Figure 42). Pension replacement rates are higher than in peer countries and close to the OECD average, while mandatory pension contribution rates are lower than in CEEC (Figure 43). Savings in the second pillar introduced in 2005 are low (Figure 44, Panel A), despite relatively generous taxation rules (Panel B). This reflects low premiums in the second pillar as pension funds follow low equity investment strategies (Panel C).

A general pension reform was adopted in 2012-13 – in line with OECD recommendations – which streamlined the points-based pension system, incorporated special regimes for the armed forces and police, switched to inflation-based indexation and adjusted the statutory retirement age so that it increases progressively and in line with life expectancy.

However, in 2019 the government backtracked on the link between the retirement age and life expectancy and frozen the statutory retirement age at 64 years. This will seriously increase the pension system deficit (OECD, 2019a). A link between the retirement age and life expectancy needs to be restored to preserve long-term fiscal sustainability, lengthen working lives and make sure that the Slovak Republic continues its convergence path towards high-income OECD countries.

Other reforms are needed to prolong working lives. Improving the efficiency of the health care and long-term care sector, active labour market programmes specifically targeted at older workers, enhancing lifelong learning opportunities and encouraging older workers to participate in adult education can have substantial long-term benefits by increasing older workers’ employment and labour force participation. In the short term, Slovak authorities may also consider attracting Slovak migrants. In fact, one tenth of the Slovak population is now living abroad (OECD, 2019). Returning migrants could bring back skills, networks and financial capital, while at the same time increasing and rejuvenating the workforce.

46 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 42. Workers retire early compared with other OECD countries A. Effective retirement age 2018 Male

75

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B. Share of individuals who accumulate pension and labour income Percentage of population aged 55-69 retired and employed, 2012 20 18 16 14 12 10 8 6 4

Source: OECD (2019), Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris.

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REFORMS MUST CONTINUE | 47

Figure 43. Replacement rates are higher than in CEEC, while contribution rates are much lower A. Gross pension replacement rates from mandatory public, private and voluntary private pension schemes and total net replacement rate1 Mandatory public

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Source: OECD (2019), Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris.

Table 7. OECD recommendations to ensure the long-term sustainability of the public finances Abolish the cap on pension age and re-introduce a link of the retirement age to life expectancy (2019 Survey).

Continue to simplify work visa and residence procedures for highly skilled workers (2019 Survey)

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48 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Figure 44. Savings in the second pillar are low despite high tax incentives A. Private pension savings Total assets in funded and private pension arrangements, % of GDP, 2018 or latest available year 200 180 160 140 120 100 80 60 40

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ITA

NOR

CZE

LTU

POL

SVN

DEU

AUT

LUX

HUN

TUR

0

GRC

20

B. Tax advantages in second pillar Present value of taxes saved over a lifetime, as % of the present value of contributions, individuals with average earnings 60 50 40 30 20

IRL

MEX

ISR

BEL

POL

LTU LTU

AUS

USA

NLD CHL

SVK

FIN

FRA

SVN

CZE

JPN

LUX

TUR

ISL

HUN

CEEC

ITA

FRA

NOR

OECD

EST

CHE

AUS

CAN

PRT

GBR

DNK

DEU

FIN

LVA

POL

KOR

BEL

ESP

AUT

GRC

CHL

NZL

0

SWE

10

C. Pension fund investment strategies Share of equity in total pension assets, % of total investments, 2018 or latest available year 50 45 40 35 30 25 20 15 10

NOR

EST

NZL

AUT

USA

ISL

NLD

CAN

IRL

LVA

CHE

DNK

CEEC

OECD

ISR

LUX

MEX

ITA

SWE

TUR

ESP

PRT

GBR

GRC

JPN

DEU

HUN

KOR

SVK

CZE

0

SVN

5

Source: OECD (2019), Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris; and OECD (2018), Financial Incentives and Retirement Savings, OECD Publishing, Paris.

REFORMS MUST CONTINUE | 49

Changes in environmental policies can help make economic growth more sustainable in the longer-term Despite improvements in environmental quality since the 1990s, several important concerns remain. Greenhouse gas emissions per unit of GDP have fallen by 75% compared to 1990 and are now below the OECD average (Figure 45, Panel A). This is mainly thanks to changes in the energy mix and industrial restructuring (OECD, 2014 and 2017). However, progress has slowed since 2015. Without further actions, emissions are expected to increase by 2030, especially in sectors not covered by the EU emissions trading scheme (OECD, 2020). A particularly serious issue is air pollution. Small particle (PM2.5) emissions have decreased only slightly, and population exposure to air pollution remains high, far above the OECD average (Panel B). This leads to significant mortality risks, with 3200 premature deaths due to poor air quality in 2017, and associated welfare costs estimated at around 6% of GDP in 2017 (OECD, 2020). In addition, poor air quality may exacerbate vulnerability to pandemics like the COVID-19. Residential heating, vehicles, and landfill account for most of PM2.5 and nitrogen oxide (NOx) emissions (OECD, 2020). This is partly due to the exemption of households from excise duties on coal and preferential tax treatment on diesel vehicles (OECD, 2020). In addition, landfill is still the major waste management method, and the recycling rate of municipal solid waste in Slovak Republic is the lowest in the European Union (EC, 2020).

Making the tax system more environmentally friendly would be desirable both from an economic and environmental perspective. Environmental tax revenues have been declining. Reversing this trend would provide room to reduce taxes that are more harmful to growth such as taxes on labour. Removing the tax exemptions on household energy consumption, together with increasing taxes linked to air pollution or carbon content, should be considered as recommended in the 2019 OECD Survey (Table 8). Introducing a carbon tax in sectors not covered by the European Union’s Emission Trading System (EU-ETS) should also be considered as recommended in the 2017 and 2019 OECD Surveys, given that most of Slovakia’s CO2 emissions are outside this scheme (Table 8). Raising the landfill tax would provide stronger incentives to shift to more sustainable waste management practices. The government gradually increased the landfill tax in January 2019 to bring waste management closer to European norms, but more needs to be done to meet the 25% national target for the landfilling rate by 2030 (OECD, 2020). Reforms in these areas would help make the Slovak Republic’s future growth more sustainable.

Figure.45. Progress was made on greenhouse gas emissions but air pollution remains a serious concern A. Total greenhouse gas emissions per GDP kg/USD

B. Mean annual concentration of PM2.5 μg/m3 Slovak Republic

OECD

1.2

30

1.0

25

0.8 20 0.6 15 0.4 10

0.2

5

0.0 1990 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016 2017 Source: OECD Green Growth indicators database.

1990 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016 2017

50 | 20th ANNIVERSARY OF THE SLOVAK REPUBLIC’S OECD MEMBERSHIP: Achievements and remaining challenges

Table 8. OECD recommendations to improve the environmental quality Increase energy taxes (2019 Survey).

Align the implicit taxation on emissions of CO2 and other pollutants across different fuels and uses (2019 Survey).

Remove support for brown coal mining in electricity generation (2017 Survey).

Consider introducing a CO2 tax in sectors not covered by the EU- ETS and raising the tax rate on diesel fuel (2017 Survey).

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REFORMS MUST CONTINUE | c

“The Slovak Republic has made remarkable progress in raising living standards since joining the OECD 20 years ago. In those two decades of fruitful collaboration, our partnership has gone from strength to strength. As an active OECD member, the Slovak Republic has engaged in the exchange of best practices, knowledge and advice, and helped set international standards. As the Slovak Republic grapples with the COVID-19 pandemic, the OECD will continue to offer support through in-depth analysis, dialogue and evidence-based policy recommendations that will help the Slovak Republic back onto a path of inclusive, resilient and sustainable growth.”

Angel Gurría, OECD Secretary-General

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