2 ECONOMIC POLICY IN SLOVAKIA 1990-1999 ANTON MARCINCIN AND MIROSLAV BEBLAVÝ editors 3 The book was supported by the Embassy of the United States of America from the Small Democracy Grants Program. Editors ©Anton Marcincin a Miroslav Beblavý, 2000 © Martin Barto, Miroslav Beblavý, Lucia Haulíková, Marek Jakoby, Tomáš Kmet, Martina Lubyová, Anton Marcincin, Karol Morvay, Andrej Salner, Ján Tóth, Daniela Zemanovicová, 2000 ISBN 80-968147-1-0 4 LIST OF AUTHORS .......................................................................................................9 FOREWORD.................................................................................................................. 10 1 INTRODUCTION...................................................................................................... 12 2 OVERALL MACROECONOMIC DEVELOPMENT.................................... 18 2.1 Introduction..............................................................................................................19 2.2 Characterization of the Development of Principal Macroeconomic Parameters .....19 2.2.1 Performance of the Economy...........................................................................20 2.2.2 Inflation............................................................................................................23 2.2.3 Unemployment ................................................................................................27 2.2.4 External Equilibrium........................................................................................29 2.2.5 Macroeconomic Results Compared to Other V4 countries .............................30 2.2.6 Conclusion........................................................................................................32 2.3 Macroeconomic Development During the Various Stages of Transition ................33 2.3.1 Characteristics of the Baseline Status Quo......................................................34 2.3.2 The Period of Initial Stabilization (1990-92)...................................................36 2.3.3 The Reversal and Revitalization Stage (1993-95)............................................40 2.3.4 Disbalanced Growth Stage (1996-98)..............................................................43 2.3.5 Equilibrium Recovery Stage (1999-) ...............................................................48 2.3.6 Notes on the Expected Development ...............................................................50 2.4 Conclusion................................................................................................................52 2.5 References ................................................................................................................53 2.6 Annex........................................................................................................................58 3 FISCAL POLICY....................................................................................................... 60 3.1 Introduction..............................................................................................................61 3.2 Getting the Numbers Right.......................................................................................61 3.3 Fiscal Policy Formation............................................................................................65 3.4 Twin Deficits in Small Open Economies .................................................................67 3.5 Cyclical vs. Structural Fiscal Deficit........................................................................70 3.6 Fiscal Policy before 1993 .........................................................................................71 3.7 Two Phases – Good Times followed by Bad Times ................................................74 3.7.1 Phase One: The Good Times ...........................................................................76 3.7.2 Phase Two: The Bad Times .............................................................................77 3.8 Revenues...................................................................................................................77 3.8.1 Direct Taxes .....................................................................................................77 3.8.2 Indirect Taxes ...................................................................................................80 3.8.3 Excise Taxes.....................................................................................................81 3.8.4 Other Taxes ......................................................................................................81 3.9 Expenditures .............................................................................................................82 3.9.1 Consumption....................................................................................................83 3.9.2 Subsidies to Enterprises ...................................................................................84 3.9.3 Capital Expenditures ........................................................................................84 3.10 Debt Sustainability.................................................................................................86 3.11 Conclusion..............................................................................................................88 3.12 References ..............................................................................................................88 3.13 Appendix 1: Structural vs. Cyclical Deficit, Methodology ....................................90 3.14 Appendix 2: Detailed Fiscal Data...........................................................................92 5 4 MONETARY POLICY............................................................................................. 94 4.1 Introduction..............................................................................................................95 4.2 Monetary Policy Results in the 1990s......................................................................95 4.3 Monetary Policy within Czechoslovakia................................................................100 4.3.1 The Institutional Framework – The State Bank of Czechoslovakia...............100 4.3.2 Was Czechoslovakia an Optimum Currency Area?.......................................101 4.4 Monetary Policy in Slovakia..................................................................................106 4.4.1 The Institutional Framework and Central Bank Independence......................106 4.4.2 Monetary Policy in the Years 1993-1995: From Zero to Convertibility.......110 4.4.3 The Years 1996-1998: Conflict between Monetary and Fiscal Policy ..........114 4.4.4 Monetary Policy after the Abolishment of the Fixed Exchange Rate............119 4.4.5 The Monetary Regime after January 1, 2000.................................................121 4.4.6 Monetary Policy in Slovakia and the European Central Bank.......................123 4.5 Conclusion..............................................................................................................125 4.6 References ..............................................................................................................127 5 WORLD ECONOMY..............................................................................................132 5.1 Introduction............................................................................................................132 5.2 The end of the 80s – Cold War Ends......................................................................132 5.3 1990 – Western Europe in Recession, German Re-Unification.............................133 5.4 1991 – Russian Coup, Economic Slump Continues...............................................134 5.5 1992, 1993 – Maastricht Treaty .............................................................................134 5.6 1994 – US and European Recovery, WTO............................................................136 5.7 1995 – Recovery Continues, Mexican Crisis .........................................................137 5.8 1995, 1996 – US New Economy and Maastricht...................................................137 5.9 1997 – Asian Financial Crisis, Europe’s New Left................................................138 5.10 1998 – Russian Crisis ...........................................................................................140 5.11 1999 – Euro Introduction, EU Accession Talks..................................................140 6 FOREIGN TRADE..................................................................................................142 6.1 Introduction............................................................................................................143 6.2 Development in the Basic Indicators of Slovak Foreign Trade..............................144 6.3 Commodity Structure.............................................................................................148 6.4 Effect of Foreign Investments................................................................................149 6.5 Competitiveness of the Slovak Production.............................................................150 6.6 Transformation Effect ............................................................................................156 6.7 Economic Policies in the Area of Foreign Trade....................................................158 6.8 Territorial Structure................................................................................................159