Transcript | 8. lecture: How to continue… (Miroslav Beblavý) - University for modern Slovakia

The final lecture will be dealing with the question – how to continue? It’s content will be pointing out certain key economical points, which are important for the future economical success of Slovakia. So let’s have a look at what we have to do, to be able to catch up the rest of the economically developed countries. The lecture, contrary to the previous ones, isn’t based on the overview of economical literature or statistics, but my own personal view.

At the beginning it’s important to emphasize, what already has been doubted in my previous lecture which is the question of economical growth. When we look at the biggest life problems of Slovak people – then unemployment and living standard is always mentioned first. Even though the unemployment has been decreased  during 2004-2008, but with the current recession it is coming back to us and is today again on the first place, closely followed by living standards. Only after and with a quite a bit delay, there are other factors like corruption or health care etc. So work and financial balance is for people definitely on the first place. However both of these things are dependant on the economical growth. Of course, the economical growth isn’t a remedy for everything and can be measured by different means. However regardless to that, we really need it. Because permanently held and well paid jobs can only be created if the economy is growing. If the “cake” stays the same we can only keep re-dividing it, or dream about how great it would be if we took money from a few rich people, but this simply isn’t a solution. It’s not a problem that this “cake” would be in Slovakia divided less evenly than it is for example in Austria or Germany. It’s divided very similarly. The problem is that it’s simply much smaller. So the right way is to make this “cake” bigger and that will be one of the main topics of today’s lecture. If the markets don’t grow and the economy is stagnating, then the government can accept any safety measures, the overall unemployment will not decrease. At most it can serve as a temporary patch, which won’t in the end effect solve the problem of permanent prosperity.

So what’s with out economical growth? We can pretend to be rubbing our bellies and comforting ourselves that we have the highest economical growth within the EU. In the end we’re still (with the exception of year 2009) near the top or at the top of this indicator. This means that we’re one of the best within the Euro-zone. It’s  the heritage of the inflow of foreign investors to our country and reforms, which have enabled this under very good conditions. However the problem is that today is the Euro-zone as a whole not growing so fast, it is assumed that the next year will be the end of the recession or stagnation respectively. So we can be proud of our first place, but if the whole is moving slowly, we can’t run away from it. We can only tolerate the stagnation or try and work on ourselves to move even more forward.

Our fate doesn’t bind our hands as much as the politicians and economists tell us. Even though we are a small open economy and so we depend heavily on what we are able to export and sell to others. But what is forgotten is the second – positive side of being a small, open economy. Which is that we are able to change our structure and develop even when Europe as a whole is not really doing so well. So exactly in times when big companies are looking for places where they would be able to produce cheaper and be more able to compete. Slovakia is a small country and as we recently saw, three car factories were enough to radically change the shape of our industry. Two investors in the media and LCD monitors were enough to radically change another part of our sector.

It’s enough to take a look at Ireland, which is today seen as a victim of the irresponsibility of the bankers and politicians. But if we look at the real section of Ireland’s economy, so the one that produces something, then the inflow of foreign investment into Ireland has increased even more during the crisis. So Ireland is an example of how to be attractive even despite of problems. In other words, Ireland has two economies today– it has the nationalized (by the country supported) banks, it is after a giant estate bubble, which has left great debts and this is the negative part. But it also has a flexible and developing healthy production economy. This is the main reason for why Ireland is considered to be a relatively promising example (unlike Greece) of how to fight the debt crisis on an intra-national basis and the get out from the mistakes.

It’s necessary to emphasize, that the crisis in Euro-zone is not necessarily a crisis of the Slovak export. Slovakia exports and is linked to the German economy and that is linked to the global economy and the German economy is doing quite well (the lowest unemployment in 20 years) and that thanks to the necessary reforms and the fact the Germany exports into the developing countries (China, Brazil etc.). Because the world as a whole is not in a crisis. The problem is regional, European. The world economy is growing and it’s growing quite nicely.

A very important question is the question of working power. Slovakia traditionally bet on very cheap working power (from a European point of view) while adequately qualified. However today the situation isn’t really like that any more. Thanks to the entrance into the Euro-zone our wages grew rapidly. So Slovakia isn’t from the side of the Visegrád countries as much attractive as it used to be considering cheap working power. This can’t be seen only from the negative side, because it’s also a proof of our success.

The advantage of Slovakia lies in the strong base in the education system, which has been running actually since the time of Maria Theresa. So in times, when in some European countries nearly no one went to school, here everyone did, or has taken at least 4 years respectively. Plus, here’s also a tradition of the commonly spread middle education, so everybody has high school. This is our strength. But we also have weak spots. Which is mainly the fact that our educational system was orientated towards an economy that doesn’t exists anymore, towards an economy, where everyone is working in some factory. Today for example in Slovakia, which is one of the most industrialized countries in Europe together with the Czech republic or Slovenia, only one third of people work in the industry. This means that the other two thirds work in services, because there isn’t as many people in agriculture as there used to be. So logically, we need as many qualified people for services as we can get. However our education system was primarily designed to create good workers. But this isn’t enough nowadays anymore and since we were unable to adjust the style of education to the new conditions we have been lately listening to the complains of the employees, that the educational system is a problem and a sore spot of our readiness. The real limit of the growth of Slovakia is the insufficiency of qualified working power. We’re good in quantity, but the quality is a bit worse. So the problem is a question, how to secure sufficiently good education system thanks to which we could move forward.

Another important part is the area of science innovations and inventions. The more wealthy we want to be, the more we have to focus on being able to invent something and also produce it. In this we have a great but unused potential in Slovakia. We managed to attract many foreign investors to Slovakia, who produce here very sophisticated things (Volkswagen). If we take a look at the table, done by the Harvard University and which is dealing directly with the question of production complexity of the economy, we see that Slovakia, even thought it’s not one of the very best, is within the top ten. Our problem is, that we don’t have enough businessmen in Slovakia, who would focus directly on research and development of products and not only their production. However we have at least one advantage, which is the presence of those investors, who deal with production. The so called production nationalism is invalid. Big companies like Google, Microsoft or Siemens have their research bases around the whole world. Not only in the home countries. The main problem of Slovakia is, whether it has enough qualified people who would be able to do this kind of work.

Naturally, besides the foreign investors we should focus on the domestic businessmen. One possibility of how to help is to create some financial support funds and overall pour money into it. However this possibility hasn’t been very successful till now.  And it’s very easy to destroy this sector by pouring money into it. It may sound strange, but it happens like this, that without the participation of the country, every young person thinks how to do something sellable. One is motivated to go after the customer. And at the time when national money is poured into it, it’s not really so important, whether you can create something that the customer wants, but whether you can do something that will make the officer or politician happy. This radically changes the setting of the whole scene. A good example are internet portals dealing with the search for work, which are very successful. If the country tried to run these portals with the help of Euro-funds, it would end up very tragically. Another similar example is the sale of tickets for cultural events with the help of private companies, which is working relatively fine. The system planned by the government hasn’t even been started yet. And we could name many more similar examples.

Now lets have a look at the topic of infrastructure. It is talked about highways, roads and about railways. The infrastructure is naturally very important if we want to have an economy that is successful in all regions. This won’t happen without a good traffic link. However we have to stress that it’s not a general remedy. If we consider the experiences of the countries like Italy, Spain or even Greece, where money from Euro-funds were used to build robust road and highway networks, then without the other things that we have mentioned it wouldn’t automatically activate the growth in the regions lagging behind. Good roads are more like a necessary condition rather than a sufficiency. However in Slovakia we’re staying behind in all aspects of traffic infrastructure, but also other (IT, telecommunication, etc.). There was an improvement, but we still didn’t catch up to the developed countries. Investments into infrastructure are therefore a very important part of our future success.

The last category that needs to be highlighted is the institution quality. This category is probably the most abstract one out of them all. The fact that we need roads, professionals, better education and that at the end of this road lies success is relatively clear. However the quality of institutions sounds abstract. What is meant by it? Firstly, it’s about the ability of the country and its institutions to foresee and the second is the quality of their decisions. So if you’re a businessman or employee, you can rely on what will happen if you turn to this institution (money enforcement, protection from corrupt inspectors etc.). This is an area where Slovakia is lagging behind a lot. Not only due to corruption, but it’s also about a very long waiting period, which one has to go through if one wants justice to be done. It makes a big difference whether you enforce a debt within a month or after five years.

Let’s have a look for example at Russia, which has great mineral resources, relatively educated people – for the standards of east Europe. This means that it’s meeting all conditions for a great success. However everyone knows that if it wasn’t for oil or gas – Russia wouldn’t grow. Russia is a very poor country. And one of the reasons is the quality of its institutions. For example Ikea decided to close its shops there because it wasn’t able to further deal with the corruption there, which reached giant dimensions. If you stand against a country which is ingrown with mafia, you died in prison. As it happened to the Russian lawyer Sergej Magnicki, who decided to stand against the officers who stole investment funds. So if you are a very unpredictable country, many foreign investors simply won’t come, because the risk is too great.

The second part of the question dealing with the institution quality is the question of the capacity of the country. It’s basically the ability of the country to make good decisions in things it is supposed to deal with. One of the possible solutions is to cut the country, because it will never be able to make good decision. However I think that the situation is in reality even more complicated. Because the transfer of responsibility to a businessman has its limits. If we take a look at the real health care or education system, those are things that have never in any developed country been shifted completely to the residents. The country always has to set certain ground rules. Who can be a teacher? How is the education financed?  What are the schools motivated to do? And so on. The quality of the decisions of a country is irreplaceable. Today we are more in the era of building and not cutting of the country.

Let’s get back to innovations for a bit. In order for innovations to function, in every country there has to be a healthy cycle, where the country pays and helps with the so called basic research and then the motivated individuals take this knowledge and make new products, services, goods. So logically, the more you are in the second part the less is the role of the country direct, but the role of the country in the first step is irreplaceable. Even in the USA where the economical system is much more liberal, is the country in the first area irreplaceable. Not only through various grants but also through research directly funded by the individual institutions (Pentagon). A well known example is internet, which was created on the basis of army orders. Silicon Valley was created thanks to the defence industry of the USA, to be close by it during the cold war.

The role of the country is irreplaceable, but they key is the quality of decisions. It can put a lot of money into science. However if you divide it wrong, you won’t get any results. One of the statistics, which is usually forgotten, is for example one, according to which the former Czechoslovakia gave more money on science (on % of GDP) than for example the USA. And we didn’t invent the internet nor many new medicaments. Officially, there was a lot of money, but the majority wasn’t spent wisely. In other words, the ability of the country to do things well is key in today’s development. We wont find a country with rich people and dysfunctional government (probably with the exception of oil emirates).

If we want to do significantly better, we have to push on. It’s possible, but it’s difficult. In order to achieve this we have to restart the growth and focus mainly on education, science and innovations, infrastructure and quality of institutions. These are four topics which are worth following with our new government. It is doing something about these four aspects? If yes, then it’s leading us forward.

However all this has one basic condition and those are healthy public funds. If we meet same fate as the Greeks, we can have a fantastic educational policy, nothing will save us from bankruptcy. So we shouldn’t forget that healthy public funds are crucial. Not only short term, but also long term. Without long term and continual changes for example in the pension or health care system we will in 5 or 10 years have a rapidly worsening management also due to the ageing of the population. That’s why it can easily happen that in 10-12 years we will get back to these questions – why isn’t the public funds management working, why are we on the verge of bankruptcy etc.. Healthy public funds are a crucial but not a sufficient condition. There are countries, that have healthy public funds, but still are poor or not growing. We shouldn’t overestimate them, but we also shouldn’t underestimate them, because no country has yet managed to get very far with weak public funds. Respectively, it was more like the Greek illusion.