Articles & Studies

A radical reformer who is putting his views into practice

Europe can respond effectively to globalisation only by embracing far-reaching economic reforms, including liberalising labour markets, opening services to cross-border competition and rationalising social welfare, says Ivan Miklos, Slovakia’s reformist finance minister.

“Of course for some social groups it will be tough. But it will be better for many others. The real question is: what is the alternative to reform? Who will stop globalisation? Who will stop the global pressure? The later they (governments) act the higher will be the costs,” says the 45-year-old economist.

As the finance minister of a small country on the eastern borders of the European Union, Mr Miklos is no heavyweight in EU affairs. But his remarks demand attention because his track record as an economic reformer is among Europe’s best.

For eight years he has presided over a transformation which has seen Slovakia recover from the authoritarian rule of Vladimir Meciar, the former prime minister, and establish itself as a top location for foreign direct investment, especially in the auto industry.

Mr Miklos, working closely with prime minister Mikulas Dzurinda, has stabilised the public finances, deregulated the economy, privatised most state-owned companies and launched reforms in taxation, administration, healthcare and welfare benefits. His radical programme for flat rate taxes has prompted other states to follow suit - and generated arguments far away from Bratislava.

The reforms have, of course, come at a price. There have been protests from workers who lost their jobs through industrial restructuring, and from poorer people obliged to contribute to health care costs as charges - albeit modest - have been imposed for visiting the doctor.

In the most dramatic scenes, unemployed people staged demonstrations challenging a programme which tied unemployment benefits to participation in public works schemes.

Only once did public protests force the government to change tack - in the case of student fees. At other times, ministers have responded to public pressure by softening reforms slightly, for example moderating the effects of social welfare cuts.

Overall Mr Mikos and his colleagues have stuck to their guns. The finance minister argues that the benefits to Slovakia as a whole have come in a strong economic growth rate - 5.5 per cent in 2005, rising real wages and falling unemployment.

His political opponents, headed by Robert Fico, chief of the populist Smer party, say that many poorer Slovaks are losing out in the process and are demanding increases in welfare spending. After winning power in 1998, Mr Miklos and Mr Dzurinda secured a new term in the 2002 general election in a rare victory for an incumbent reformist government in central and eastern Europe. This year they face the voters again.

The coalition parties are doing poorly in opinion polls but still have time to recover before the September polls. Mr Miklos says: “I think the situation is still open.” He adds that with only Smer actively opposed to reforms, Slovakia’s economic transformation is not under serious threat.

“All other parties are supporting reforms or they think the reforms only need some small changes but not changes which are significant regarding the whole architecture of reform.”

Mr Miklos concedes that many Slovaks are tired of reform. But he denies that reforms necessarily doom their political authors to electoral failure. “It is not true - as is the usual perception in western Europe - that if politicians are doing reforms it is very risky for them. I think that if we had not been doing these reforms our chances to be re-elected would be smaller. If we are not now re-elected it will not be because of reforms.”

Slovakia’s experience offers lessons for other countries. Mr Miklos says the most important pre-condition for reform is political will, followed by vision, courage and electoral support.

It is also vital to start reforms as soon as possible after taking power because the costs of change are usually more visible than the benefits in the first year or two, says Mr Miklos. Reformers who start early have the chance to see the benefits before they face voters in another election.

In western Europe, conflict between the short-term interests of the people, and of politicians, and the long-term interests of the country delays reform, says Mr Miklos.

“If I am to name the three most important problems of western Europe, they are the very unsustainable social system (with counter-incentives keeping people from work), the inflexible labour market and the absence of a single European market in services, which now account for 70 per cent of the whole economy.”

He urges west European states to open markets to east European workers and foreign service companies.

“The absence of a free labour market and a services market is a bigger problem for old member countries than new member countries (because new member countries are attracting investment and generating growth).

“In the old member countries the absence of a single labour market and the liberalisation of services are among the reasons for their lack of competitiveness.”