Slovakia’s economic freedom score is 69.7, making its economy the 35th freest in the 2010 Index. Its score has increased by 0.3 point from last year, with a noticeable drop in labor freedom offset by small improvements in four other economic freedoms. Slovakia is ranked 18th out of 43 countries in the Europe region, and its overall score is higher than the world average.
Performing well in most of the 10 economic freedoms, Slovakia has recorded annual growth of around 8 percent for the past five years. Monetary stability has been maintained, taxes are competitive, and the entrepreneurial environment is increasingly conducive to private-sector development. Regulatory and legal frameworks are more transparent. Foreign investment is actively promoted and subject to few regulations in almost all areas. The financial sector is generally strong and has weathered the global financial turmoil relatively well.
Slovakia’s overall economic freedom remains limited by two institutional weaknesses. The judicial system is inefficient and slow, and Slovakia scores relatively low in freedom from corruption, with only limited progress in recent years.
Background Back to the top
Slovakia became independent following its “Velvet Divorce” from the former Czechoslovakia in 1993. The reforms implemented by former Prime Minister Mikulas Dzurinda at that time have led to low labor costs, low taxes, and political stability, making Slovakia one of Europe’s most attractive economies, especially for automobile and other manufacturing. Very high real GDP growth in 2007 was driven by strong domestic demand and net exports. Global weakness in 2008–2009 caused a significant slowdown. The cabinet of leftist Prime Minister Robert Fico is using interventionism to try to alleviate the effects of the financial crisis. The government is promoting highway construction, pressuring utilities to curb prices, providing loans for small and medium-size businesses, and according domestic suppliers preferential treatment. On January 1, 2009, Slovakia adopted the euro as its national currency.
Business Freedom72.6 Back to the top
The overall freedom to start, operate, and close a business is relatively well protected under Slovakia’s regulatory environment. Starting a business takes an average of 16 days, compared to the world average of 35 days. Obtaining a business license takes less than the world average of 18 procedures but more than the world average of 218 days.
Trade Freedom87.5 Back to the top
Slovakia’s trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 1.3 percent in 2008. However, the EU has high or escalating tariffs for agricultural and manufacturing products, and its MFN tariff code is complex. Non-tariff barriers reflected in EU and Slovak policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members. Pharmaceuticals regulation and non-transparent licensing procedures exceed general EU policy. Ten points were deducted from Slovakia’s trade freedom score to account for non-tariff barriers.
Fiscal Freedom84.0 Back to the top
Slovakia’s tax rates are relatively low. Both the income and corporate tax rates are a flat 19 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 29.7 percent.
Government Spending64.5 Back to the top
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 34.4 percent of GDP.
Monetary Freedom78.2 Back to the top
Inflation has been moderate, averaging 3.5 percent between 2006 and 2008. As a participant in the EU’s Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also influences prices through regulations and state-owned enterprises and utilities. Ten points were deducted from Slovakia’s monetary freedom score to account for policies that distort domestic prices.
Investment Freedom70.0 Back to the top
Foreign and domestic investments are treated equally under the law. There is no screening, and full foreign ownership is permitted in most sectors. The state owns railroad rights-of-way, postal services, water supplies, and forestry companies. Reforms have further streamlined and improved the transparency of investment rules, but bureaucratic efficiency could be improved. Dispute resolution through the judicial system can be slow, and corruption is a problem. Residents may establish foreign exchange accounts. There are very few controls on capital transactions. Non-residents from EU and OECD member countries may purchase land for business use.
Financial Freedom70.0 Back to the top
Most state-owned banks have been sold, and the presence of foreign banks is strong, with three foreign banks accounting for about 60 percent of total assets. Non-performing loans have declined to less than 5 percent of total loans. All financial service operations are regulated by the central bank. Interest rates have been liberalized, and credit limits have been abolished. The financial sector has become increasingly diversified as insurance and securities companies have grown. Capital markets remain relatively small and are not fully developed. With little exposure to the structured financial products that triggered the global financial turmoil, banking remains stable and well capitalized. Adoption of the euro proceeded smoothly in January 2009.
Property Rights55.0 Back to the top
The judiciary is independent and comparatively effective, although decisions can take years and corruption remains significant. The courts recognize and enforce foreign judgments, subject to the same delays. Secured interests in property and contractual rights are recognized and enforced. The mortgage market is growing, and the recording system is reliable. Intellectual property rights are protected under Slovak law and in practice except for inadequate storage of proprietary data and improper registration of companies to produce generic drugs that are still under patent protection.
Freedom From Corruption50.0 Back to the top
Corruption is perceived as significant. Slovakia ranks 52nd out of 179 countries in Transparency International’s Corruption Perceptions Index for 2008. Legislative and executive branch corruption especially affects health care, the judiciary, and education. Slovakia is a signatory to the OECD Convention on Combating Bribery, and it is a criminal act to give or accept a bribe.
Labor Freedom65.1 Back to the top
Slovakia’s labor regulations are relatively flexible. The non-salary cost of employing a worker is moderate, and dismissing an employee is not costly. Regulations on work hours remain relatively rigid.