2009 Index of Economic Freedom

Quick Facts

Population:

• 5.4 million

GDP (PPP):

• $95.6 billion
• 8.5% growth
• 6.0% 5-year compound annual growth
• $17730 per capita

Unemployment:

• 8.4%

Inflation (CPI):

• 2.8%

FDI Inflow:

• $4.2 billion

Slovakia's economic freedom score is 69.4, making its economy the world's 36th freest in the 2009 Index. Its score is slightly lower than last year, with declines in four areas. Slovakia is ranked 20th out of 43 countries in the Europe region, and its overall score is higher than the world average.

Slovakia has high scores in most of the 10 economic freedoms. Trade freedom, fiscal freedom, investment freedom, financial freedom, and labor freedom are especially strong. The average tariff rate is low, although non-tariff barriers limit overall trade freedom. The bureaucracy dealing with investment still needs improvement, but rules have become significantly more transparent. Foreign investment is actively promoted and subject to remarkably few regulations in almost all areas of the economy.

Slovakia scores low in freedom from corruption, with only limited progress in recent years. Government spending is excessive; though down slightly over the past year, it still accounts for nearly two-fifths of GDP. The judiciary is independent of political influence, but cases take years to resolve, both for citizens and for foreign investors.

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 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. Average GDP growth from 1996 through 2005 was about 4 percent. In 2007, real GDP growth was 10.4 percent, driven by strong domestic demand and net exports. The current administration of Prime Minister Robert Fico, a leftist, has a more populist economic policy and will likely try to restrain free-market reform, especially in health care, taxation, and social welfare. Slovakia’s official target date for adoption of the euro is 2009, assuming that it meets the Maastricht criteria.

Business Freedom 73.4 Back to the top

The overall freedom to conduct 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 38 days. Obtaining a business license takes less than the world average of 18 procedures but more than the world average of 225 days.

Trade Freedom 85.8 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 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across 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 Freedom 84.1 Back to the top

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 29.5 percent.

Government Size 57.4 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 37.7 percent of GDP. The state's role in the economy has been reduced.

Monetary Freedom78.7 Back to the top

Inflation is moderate, averaging 3.2 percent between 2005 and 2007. 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 process, and full foreign ownership is permitted in most sectors. The state owns railroad rights-of-way, postal services, water supplies, and forestry companies. New reforms have further streamlined and improved the transparency of investment rules; however, more can be done to improve the efficiency of the bureaucracy. Dispute resolution through the judicial system can be slow and corruption is a problem. Residents may establish foreign exchange accounts when staying abroad or with permission of the National Bank of Slovakia. 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

The government has implemented aggressive privatization and has adopted reforms to enhance financial-sector competitiveness. All financial service operations were brought under the central bank's regulatory aegis in January 2006. Interest rates have been liberalized, and credit limits have been abolished. Although dominated by banking, the financial sector has been increasingly diversified as insurance and securities companies have grown. Most state-owned banks have been sold, and foreign capital controls almost 99 percent of the sector. Non-performing loans have declined to less than 5 percent of total loans. Capital markets remain relatively small.

Property Rights50.0 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 generic companies to produce drugs that are still under patent protection.

Freedom From Corruption49.0 Back to the top

Corruption is perceived as significant. Slovakia ranks 49th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Legislative and executive branch corruption especially affects health care, the judiciary, and education. The press has taken a more active role in reporting corruption. Slovakia is a signatory to the OECD Convention on Combating Bribery, and it is a criminal act to give or accept a bribe.

Labor Freedom75.3 Back to the top

Slovakia's relatively flexible labor regulations could be further improved to enhance overall employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not costly. Restrictions related to the number of work hours remain relatively rigid.