October 23, 2021

Beyond Going Long

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The recovery plan did not seize the opportunity

The recovery plan did not seize the opportunity

At a press conference in Bratislava on June 21, the President of the European Commission, Ursula von der Leyen, announced that the European Commission had decided to give the green light to the Slovakian recovery plan worth 6.3 billion euros. According to her, the plan meets the standards, is ambitious and of good quality. It wasn’t as excellent as the new Prime Minister Eduard Heger made it to.

According to the Index of Renewal and Transformation – RITC, among the 13 national plans that were evaluated, the Slovakian position took the place. On the positive side, it has fulfilled the basic demand of Brussels to respond to two main trends: the need for a green and digital transformation. It also responded to the third trend – population aging.

Limitations of the old growth model

However, the Recovery and Resilience Plan did not take the opportunity to formulate an answer to the fundamental question of whether the resumption of growth in the Slovak economy after the Covid crisis and in the coming years would be a continuation of the current growth model. The green shift, as we will mention, can maintain the old growth model, or it can be a signal of a new growth model.

The basic elements of the current growth model were laid down in the early years of the transition from a centrally planned economy to a market economy. Its main elements include dependence on foreign capital, which has enabled a strong export orientation to the West (exports account for 90 percent of GDP), specialization in production with low value added (Slovakia as an assembly hall), with a competitive advantage for low wages and a labor force Relatively skilled.

The completeness of the characteristics of this model includes a low degree of diversification and a high dependence on two or three industries (38 percent of industrial production and 16 percent of industrial employment in Slovakia is the automobile industry, which in 2019 accounted for up to 35 percent, of gold). 70 percent to the European Union.) The share of the auto industry in value added excluding the financial sector is about 50 percent. Regional differences and untapped opportunities for local development are characteristic of this model.

This model maintains the existence of the so-called dual economy: on the one hand, part of the economy is in the hands of foreign investors, and on the other hand, the domestic business sector, which differs from the first by low labor productivity, a lower degree of production development, and less or very low investment In innovation, lower export orientation, lower wages, similarly.

Of course, there has been a shift in the traditional growth model over three decades. Robots and the production of electric or hybrid cars are being launched in the automotive industry. Slovak batteries for electric cars from InoBat Auto have passed the test of the NCT Test Center. However, the share of private and government investment in research and development – research and development as a percentage of GDP – remains at a third of the level in the Czech Republic.

The competitive advantage of low wages is also lost: wages grow faster than value added. The growth of minimum wages, overtime wages and the like are criticized by the business community. Let’s add that wage growth may be a growth risk – but only in the logic of the current growth model.

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Characteristics of the new growth model

The statistics so far are from a study with Czech translation entitled “A New Growth Model for the Middle East European Union: How to Avoid the Trap of Specialization and Use of Megatrends” prepared by the Vienna Institute for International Economic Studies in May 2021. Recently between Vienna, Bratislava and Prague.

The study questioned why the convergence of Central and Eastern European Union countries to the EU15 slowed after 2008. Although it does not explicitly state this, it does suggest that the trap of staying in the old growth model can lead to a widening of the gap. Between the “old” and “new” members of the European Union, or to stop the real rapprochement. Therefore, a transition to a new growth model is essential. The same conclusion was reached as in the Solidary, Ecological and Modern Slovakia study, November 2020, FES Bratislava, which was intended as a social democratic alternative to a recovery and resilience plan.

Many reservations can be made about the study, but they do not detract from the importance of its conclusions, which are summarized in the last two sections: SWOT Analysis and Policy Proposals. The first is that the study does not sufficiently distinguish between the level achieved for the countries of Central and Eastern Europe and the European Union that joined the European Union at different times. While discussing the study, the president of the Czech Moravian Federation of Trade Unions, Josef Stedula, strongly objected to it. Undoubtedly, the Czech Republic is the farthest country in terms of income convergence, and Slovenia is right behind it, which was the first for many years. According to the Vienna Institute, Slovakia ranks fourth after Lithuania.

The study ignored the different starting conditions of the cases and the differences in the implementation of the transformation model which are reflected in the speed of convergence, timing of transition to a new growth model, differences in SWOT analysis, and the like. While the differences in the transformation model implemented by the Baltic states and V4 countries (according to capitalist diversity on the periphery of Europe, 2012, the Baltic states implemented the so-called neoliberal model of transformation, the V4 model states the liberal model “established” in the welfare state) are not distinguished on the As such, Slovenia has implemented a new transformation paradigm and has avoided transformational stagnation. This, along with more favorable starting conditions, enabled it to catch up with the EU-15 in terms of GDP per capita faster than other countries. Setting a wage level that reflects price liberalization has also helped Slovenia to speed up the catch-up rate of household personal consumption.

The new growth model aims to respond to three major external trends: demographic, technological and environmental. Nothing new at first glance. In the Slovak context, it is finally accepted how an aging population is negatively affected by permanent migration to work abroad. Brexit has brought immigration back to Great Britain, but the brain drain to the Czech Republic continues and the talent loss is irreplaceable not just for digital transformation. In 2019, up to 39 percent of Slovaks living in other EU countries had a higher education, while only 25 percent of those living at home had. However, according to the Vienna Institute, the demographic trend in Slovakia is not only a “weakness” but also a “strength”: it could be pressure for faster robotics.

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The old growth paradigm has set a trap of functional specialization from which it is not easy to escape. The study clearly shows that the functional specialization of the Slovak economy is complementary to the functional specialization of the German economy. The German economy generates the largest share of value added in headquarters economy services, research and development, marketing, logistics and other high value-added support activities.

The Slovak economy specializes in production, the so-called factory economy, where high value added is not achieved. Therefore, any increase in costs threatens the profitability of companies. This knowledge is not entirely new. What must be realized is that such a complementary model of functional specialization towards the richest countries of the European Union tends to maintain it with all the negative consequences. This trap can only be avoided with a long-term targeted policy.

It is possible to fall into the trap of the so-called factory economy even with the green transformation, as long as we stay with the functional specialization of production only and leave the stages of specialization with a higher degree of added value, such as environment-innovation-different.

The study draws attention to what we basically know that the Slovak Republic is lagging behind in Industry 4.0, in the development of artificial intelligence, in robotics, in nanotechnologies, biotech and the like. According to the Digital Economy and Society Index, the Slovak Republic has the largest gaps in human capital, in the integration of digital technologies and in digital public services. It is necessary to recognize the emergence of a new type of inequality – digital inequality between countries, between large, medium and small companies, between regions, etc. there are many reasons. These include low investments in research and development (the percentage of GDP varies between 0.5 and 1 percent of GDP, in the Czech Republic it is up to 2 percent), and in information technology (again in the Czech Republic it is several times higher) , Insufficient level of digital infrastructure and gaps in the level of education. The level of the number of university graduates in Slovaks still lags behind the EU average.

Going green and combating climate change are among the most controversial in Central and Eastern Europe and the European Union. Letting go of fossil fuels in countries such as Poland, and part of the Czech Republic, is much more difficult than in the Slovak Republic. European policy on RES in Central and Eastern Europe and the European Union is often criticized and considered suicidal. Cost aspect, lack of investment, high social costs and the like are emphasized. The implementation of the European Commission’s proposal to include housing and road transport in the emissions trading scheme could further contribute to the growth of energy poverty. The question is also whether or not nuclear power will be included in the classification of sustainable investments. Without nuclear power, the future of energy is black.

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The study does not explicitly comment on this, but sees green industrial policy and green new jobs as a new opportunity. It is a pity that, in contrast to the FES study mentioned, the Vienna Institute ignores local development and its contribution to the new growth model (local energy, local food production, local social entrepreneurship etc.).

How to transition to a new growth model

Even the most convinced economic liberals admit that the role of the state in the economy cannot be dispensed with. They recognized this in saving the financial and non-financial sectors during the 2008-2009 crisis, and in the current crisis, they urgently seek help from the state. The role of the state is irreplaceable even in the transition to a new growth model. WIIW talks about the business state – as we have seen in many Western countries. Business government should not only be at the central level, but also at the regional and local level. The study does not analyze the relationship between decentralization and the growth model at the expense of cause.

We can agree that the transition to a new growth model cannot be the second ‘shock therapy’. This time, its costs could lead to a social revolution. The SWOT analysis shows how to take advantage of our strengths and opportunities in this new transformation, such as the current crisis (the so-called relocation of supply networks or partial relocation to the EU) or the digital development gaps in EU15 (Estonia has outperformed digitalization even in the richest EU countries) ).

Among the transition tools, the Vienna Institute defines a new industrial policy, the goal of which should be to attract innovation-intensive sectors of the supply chain. To be honest, it is difficult to say what the Ministry of Economy wants to achieve with its investment incentive policy: if it wants to address regional disparities and unemployment and avoid falling into the trap of unfavorable job specialization, as in the case of the Ziegler Group. Investment in the industrial area of ​​Rimavska Sobota, where we are now.

With the policies of shifting to the new model, the Vienna Institute recommends that tax policy and budget be set so that domestic resources are used primarily for its financing. The question needs to be answered: tax brakes, spending caps, or another promising way out. The amount of minimum wages must also be estimated from this point of view. From the very beginning of the transformation, the business sector must stimulate not only the automation of low-paying jobs – and the contribution to digital transformation, but also its other technological, product and organizational innovations.

Birgitta Schmogener, former Minister of Finance