 Business Climate (and Opportunities)
Slovakia has mastered much of the difficult transition from a centrally planned economy to a modern market economy. The Slovak government made progress in 2001 in macroeconomic stabilization and structural reform. Major privatizations are nearly complete, the banking sector is almost completely in foreign hands, and foreign investment has picked up. Slovakia's economy exceeded expectations in the early 2000s, despite recession in key export markets.
Revival of domestic demand in 2002, partly due to a rise in real wages, offset slowing export growth to help drive the economy to its strongest expansion since 1998. Solid domestic demand boosted economic growth to 4.1 % in 2002. Strong export growth, in turn, pushed economic growth to a still-strong 4.2 % in 2003 and 5.4 % in 2004, despite a downturn in household consumption. Multiple reasons entailed a GDP growth of 6.1 % in 2005, the 4th highest rate in the EU (after the three Baltic states). The GDP growth is expected to reach at least 6 % in 2006, and 6.5 % in 2007. The growth in Slovakia's gross domestic product, which reached 7.5 percent p.a. in real terms in the fourth quarter of 2005 according to the Statistics Office estimate, came as a surprise to local analysts, given that big foreign investors, such as Peugeot or Kia have not launched their production yet. Ford Motors will be setting up their production facilities in 2006.
Unemployment, rising from 14.9 % at the end of 1998 to 19.2 % at the end of 2001 (seasonally adjusted harmonised rate) during the radical reforms introduced by the Slovak government since 1999, decreased again to some 15% (spring 2006), but still remains EU's 2nd highest (after Poland).
Inflation dropped from an average annual rate of 12.0 % in 2000 to just 3.3 % in the election year 2002, but it rose again in 2003-2004 due to necessary increases in taxes and regulated prices. Nonetheless, CPI fell below 3 % in 2005.
Slovakia plans to adopt the Euro currency on 1 January 2009 and has already entered the ERM II for this purpose (Slovak Euro coins).
Slovakia is among the most attractive countries in the EU for foreign investors mainly because of its low labour costs (a 2005 survey by the prominent consultant firm Deloitte shows that Slovakia has the lowest labour costs in the European Union) and low tax rates. This issue has sparked criticism from some other EU countries, which accuse Slovak government of social and tax dumping.
In recent years, Slovakia has been pursuing a policy of encouraging foreign investment. However, that has not shown any benefits so far in innovation capabilities within the country. Despite a sufficient number of researchers and a solid secondary educational system, Slovakia (as well as some other post-communist countries) still face many challenges in the field of modern knowledge economy.
Within the EU, Slovakia ranks next to last on knowledge creation and last for innovation and entrepreneurship. The business and public R&D expenditures are deeply below EU average. World Bank urges Slovakia to upgrade information infrastructure and reform education system, OECD states that a stronger product market competition would help.
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