PREŠOV REGION: KEY DEVELOPMENT DYNAMICS PREŠOV REGION: KEY DEVELOPMENT DYNAMICS © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with exter- nal contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the govern- ments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected]. CONTENTS Acknowledgments 5 Acronyms 5 OVERVIEW 7 1. INTRODUCTION: SUBNATIONAL DISPARITIES AND LAGGING REGIONS IN THE EU 13 2. THE RAPID RISE: SLOVAKIA’S ECONOMIC RESURGENCE 17 3. EXPLORING THE VAST DEVELOPMENT GAP IN SLOVAKIA 23 4. THE BACK OF THE PACK: PREŠOV 29 Economic and Social Dynamics 30 Unpacking Prešov’s Structural Constraints 33 Competitive Advantages and Opportunities for the Prešov region 41 5. CONCLUSIONS AND POLICY PRIORITIES 45 Annex A. Additional Information 48 Annex B. European Structural and Investment Funds (ESIF) in Slovakia Since 2004 51 References 57 BOXES BOX 3.1 Territorial and Administrative Organization of Slovakia 25 FIGURES FIGURE 1.1 Trends in EU Convergence, National FIGURE 4.4 Drivers of Population Change and Regional, Coefficient of Variation of GDP in Slovak Regions, 1993–2017, Number per Capita,a 2005–15 14 of People 33 FIGURE 1.2 Disparities in Regional GDP FIGURE 4.5 Number of Enterprises in Prešov per Capita, EU Member States, 2016 15 Districts 34 FIGURE 2.1 GDP per Capita, Slovakia and EU FIGURE 4.7 Population Changes in Prešov Transition Economies, 2000–17 18 Municipalities, 2000–17 34 FIGURE 2.2 Net Foreign Direct Investment, FIGURE 4.8 Change in Shares of Population Share of GDP, 1993–2015 19 of Post-productive Age in Prešov Municipalities, 1997–2007 34 FIGURE 2.3 Labor Productivity, EU15, 1995–2017 19 FIGURE 4.6 Unemployment in Prešov Districts 34 FIGURE 2.4 Share of Exports and Imports in GDP, 2000–17, Percent 19 FIGURE 4.9 The Effects of Urbanization 35 FIGURE 4.10 Education and Employment FIGURE 2.5 Goods Exports by Sectors in Slovakia 36 Contributing More than 5 Percent of Total Exports, 1997–2017 20 FIGURE 4.11 Slovakia and the Regional Innovation Scoreboard 36 FIGURE 2.6 Trends in Employment and Poverty Alleviation since 2000 21 FIGURE 4.12 Quality of Governance Indicators 38 FIGURE 3.1 Slovak Regions Compared 24 FIGURE 4.13 Share of Roma Population by Municipality in Slovakia (left) and Prešov FIGURE 3.2 Contributions to Slovak GDP region (right) 40 by Industry 26 FIGURE 4.14 Visitors and Overnight Stays FIGURE 3.3 Economic Characteristics in Slovakia, by Region, 2016, Percent (left axis) of Slovak Regions 26 and Average Length of Stay (right axis) 42 FIGURE 3.4 Regional Unemployment and FIGURE B.1 ESIF Allocations, 2014–20, Total Poverty in Slovakia 27 and Per Capita 51 FIGURE 3.5 Socioeconomic Trends of Slovak FIGURE B.2 ESIF Allocations, 2014–20, Regions (Coefficients of Variation) 27 Percentage of Public Investment by EU Member 51 FIGURE 4.1 Indicators for Prešov, Other FIGURE B.3 Use of ESIF Funding by Member Regions, and Slovakia as a Whole 30 States, Percent of Planned Spending 54 FIGURE 4.2 Determinants of GDP. Prešov FIGURE B.4 Total ESIF Funding and Share and Other Noncapital Regions 31 of Projects Contracted, June 30, 2018, Percent 55 FIGURE 4.3 Changing Industrial Specialization in FIGURE B.5 ESIF Usage and Total ESIF the Prešov Region, 2012–16 32 Allocation, June 30, 2018, Percent 55 TABLES TABLE 4.1 The Innovation Potential TABLE A.2 20 Largest Private Enterprises of Slovak Regions 37 in Prešov Region by Revenue, 2017 49 TABLE 4.2 Basic Data, EU Funding in Slovakia, TABLE B.1 ESIF Allocations to Programs, 2007–13 39 Slovakia, 2014–20 52 TABLE 4.3 Doing Business in Slovakia, Distance TABLE B.2 ESIF Used in Slovakia, to the Frontier (DTF)* (0-100) 41 as of June 30, 2018 55 TABLE A.1 Industrial Parks and Their Investors in the Prešov Region, 2017 48 ACKNOWLEDGMENTS The report was prepared by Dmitry Sivaev with support from Vladimír Benč, under the guidance of Paul Kriss and Grzegorz Aleksander Wolszczak. The report is a product of collaboration between The World Bank and the European Commission (EC) in an effort to address the challenges that hold back the economic and social development of targeted lagging regions in the countries of the European Union. ACRONYMS CBC Cross-Border Cooperation CEE Central and Eastern European countries CF Cohesion Fund EAFRD European Agricultural Fund for Rural Development EC European Commission EMFF European Maritime and Fisheries EQI European Quality of Government’ Index Fund ERDF European Regional Development Fund ESF European Social Fund ESIF European Structural and Investment Funds ESO Efficient, Reliable and Open Government Program of the Slovak Republic EU European Union FDI Foreign direct investment GDP Gross domestic product GRP Gross regional product GVA Gross value added HDI Human Development Index ICT Information and communication technology IROP Integrated Regional Operational Program km Kilometer MRC Marginalized Roma communities NP National park NUTS Nomenclature of Territorial Units for Statistics OP Operational program Pp Percentage point PSK Prešov Self-governing Region (Prešovský samosprávny kraj) R&D Research and development RES Renewable energy systems SMEs Small and medium enterprises SR Slovak Republic TEN-T Trans-European Transport Networks UNESCO United Nations Educational, Scientific and Cultural Organization V4 Visegrad countries (Czech Republic, Hungary, Slovakia, Poland) VET Vocational education and training OVERVIEW 8 PREŠOV REGION: KEY DEVELOPMENT DYNAMICS The factors that hold back development of the Prešov region can be categorized as (1) inability to benefit from the FDI-driven growth that has lifted the Slovak economy in recent decades; (2) region-specific structural con- straints that make its economy less productive than those of other regions outside the capital; and (3) the difficul- ties of integrating the Roma population. Slovakia’s rapid economic growth has not spilled over from Bratislava to Prešov and other outlying regions. In recent years Slovakia has been among the fastest-growing European Union (EU) economies. In just two decades (1995–2015) average GDP growth of 3.9 percent has brought Slovakia’s GDP per capita from 40 percent of the EU-15 average to 70 percent. This impressive catch-up was fueled by foreign direct investment (FDI), most of which went to automotive and electronics manufacturing. These industries were attracted to Slovakia by its low costs and proximity to western Europe. Today automotive and electronic products account for two-thirds of Slovakia’s goods exports, twice what they contributed 20 years ago. Although growth has helped improve the well-being of the population, it has not been inclusive and it has exacerbated social divides and exposed structural problems. Since 2000 average wages in Slovakia have quadru- pled and unemployment has dropped by 12 percentage points (pp), but with little change in the number of those who are poor or in danger of poverty. This is a result of two factors: the concentration of economic growth in specific industries in a specific part of the country, and structural issues in the labor market and in education. FDI-fueled growth has created a highly productive and predominantly foreign-owned sector centered on Brati- slava. However, it has not pulled up the productivity of other Slovak firms, creating a bifurcated economy. This has created a shortage of labor at the top and middle of the skills spectrum, which has pulled wages up; while at the lower end of the skills spectrum, a substantial number of the Slovak people have no access to the opportunity created by this period of growth, as stagnant poverty rates demonstrate. Bratislava has more than double the GDP per capita of the next most developed region in Slovakia, Trnava, and more than quadruple that of Prešov. In recent years these gaps have been widening rapidly. In fact, for the last 20 years there has been no sign of regional convergence to the country’s GDP per capita. Bratislava benefits from better access to markets, a much more skilled labor force, a higher rate of capital investment, and the agglomeration effects derived from higher population density. While it is important to seek ways to reduce the divergence by supporting development outside the capital, it is unreasonable to expect Prešov and other regions to catch up with Bratislava. In recent years it appears from a drop in the pace of conversion to the EU frontier that Slovakia needs a new growth impulse, which may have to come from outside the capital. Slower growth, modest FDI inflows, and rising wages all suggest that Slovakia cannot expect the same growth model to be effective in the future. To create new growth opportunities, major structural problems need to be addressed—and that will not be possible without unlocking the economic potential of outlying regions and their people.