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  Assessment and Recommendations

  The Slovak Republic's accession to the OECD as the thirtieth member country in December 2000 followed the introduction of a number of reforms to advance its transition to a market economy. The accession occurred at the end of a period of sluggish economic growth due largely to macroeconomic stabilisation policies adopted to counteract the impact of earlier policies that had proved to be unsustainable. Final domestic demand fell by nearly 10 per cent between 1998 and 2000. Meanwhile, core inflation -- which excludes administered prices and indirect taxes -- slowed slightly and the current account deficit was halved to less than 4 per cent of GDP. A significantly positive contribution from external demand enabled Slovakia to avoid a recession, however, with output growing at a 2 per cent annual rate in 1999 and 2000...

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  Recent Trends and Prospects

  The Slovak economy has recovered from its economic downturn of 1998 to 2000, which reduced output growth to an annual rate of 2 per cent. The period of weak growth had resulted from a stabilisation package introduced to correct large imbalances, notably a current account deficit of nearly 10 per cent of GDP in 1998. The package consisted of fiscal tightening and a number of structural reforms to advance the development of a market economy. The initial result of this policy package was a nearly 10 per cent contraction in final domestic demand over the period 1998 to 2000, although a large positive contribution from external demand enabled the economy to avoid a recession (Figure 1). In 2001, domestic demand rebounded strongly, led by a....

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  Macroeconomic Policies and Challenges

  Expansionary monetary and fiscal policies made important contributions to the economic upturn in 2001. With robust growth expected through 2003, changes in the macroeconomic stance appear to be necessary. This chapter begins with an analysis of monetary and exchange rate policies. Favourable inflation outcomes and the relative stability of the Slovak koruna suggest that the National Bank of Slovakia (NBS) has been successful thus far in establishing the credibility of its monetary policy. The following section addresses fiscal policy. Despite the progress made in reducing spending as a share of GDP since 1998 and in cutting tax rates from high levels, the large deficit -- estimated at 6 ½ per cent of GDP (on an ESA95 basis) in 2001 – and the significant rise in public debt raise serious concerns. Limiting the growth of expenditures and reducing the deficit, while allowing further declines in tax rates, requires fundamental reform of the pension, health and social welfare systems. The chapter concludes with a brief assessment of macroeconomic policies...

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  The Labour Market

  High and persistent unemployment during the transition to a market economy has been a major economic and social problem for the Slovak Republic. At 19 per cent, the unemployment rate is currently among the highest in the OECD area, while the employment to population ratio is one of the lowest (Figure 17). The under-utilisation of labour lowers the country's growth potential and long unemployment spells are eroding human capital. Given the slow pace of job creation and the low probability of finding jobs, many working-age persons have left the labour force and rely on the extensive social safety net. The absence of a time limit on the duration of income support tends to perpetuate the problem...

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  Enhancing Market Forces

  The policies during the 1990s aimed at establishing a market-based economy failed to generate fully the expected gains in efficiency. Two waves of privatisation of state-owned enterprises increased the private sector's share of output to 80 per cent by 1998. However, the performance of enterprises and financial institutions was disappointing, as reflected in an increased number of loss-making enterprises, mounting non-performing loans, arrears to tax authorities and declining employment. The weakness of the banking system, which was primarily stateowned and subject to political interference, was a major factor in these problems. Indeed, non-performing loans amounted to a third of their loan portfolios, implying that much of Slovakia's high level of investment was not used productively. In addition, the institutional requirements for a market-based economy, such as bankruptcy procedures, the corporate governance framework, the commercial code and the judicial system, proved to be inadequate. Furthermore, the exclusion of foreigners from the privatisation process limited inflows of management expertise and technology....

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