Slovakia:
Problems of Democratic Consolidation
and the Struggle for the Rules of the Game

Sona Szomolányi and John Gould, editors

New York

Columbia International Affairs Online

1997

Bibliographic Data

3. Economic Transition And The Emergence Of Clientalist Structures In Slovakia

Ivan Miklos

Introduction

Despite Slovakia's turbulent political development and its fairly negative image abroad, the Slovak economy has turned in a strong macroeconomic performance since 1993. The results have been a surprise. Macroeconomic analyses by commercial and non-commercial financial and research institutions as far back as 1992 were highly pessimistic. The experts anticipated a much poorer macroeconomic performance due to the impending split of the Federal Republic and the expectation that the populist and charismatic government of Prime Minister Vladimír Meèiar would adopt economically unorthodox policies.

The following table offers an international comparison of macroeconomic indicators for the most advanced post-communist countries:

Table 1: Year-on-year macroeconomic indicators in advanced post-communist countries

	Slovakia	Czech Republic	Hungary	Poland	Slovenia
GDP growth 1993	- 4,1	- 0,9	- 0,8	3,8	1,0
1994	4,8	2,6	2,0	5,2	4,0
1995	6,8	4,8	1,6	7,0	5,0
1996	6,9	4,4	1,0*	5,5	3,5
Inflation 1993	23,2	20,8	22,5	35,2	32,0
1994	13,4	10,0	18,8	32,3	19,8
1995	9,9	9,1	28,2	27,8	12,6
1996	5,4	8,8	24,0	21,2	10,2
Unemployment 1993	12,2	3,9	11,3	14,0	15,2
1994	13,3	3,8	10,2	14,4	14,2
1995	13,1	3,6	9,3	13,3	14,4
1996	12,6	3,1	11,0	14,0	13,5

Source: National statistics, OECD (1996 GDP), World Bank, Business Central Europe
Note: *Prelimitary Data

Slovakia's relatively strong macroeconomic performance combined with the semi-autocratic attributes peculiar to Meèiar's government have led to some popular comparisons to Singapore. The conception is that like Singapore, Slovakia's political economy mixes partially-authoritative political characteristics with a liberal economy. The following essay finds this characterization incorrect. While the Meèiar government does indeed demonstrate some tendencies towards semi-authoritarianism, trends in the economy have been away from liberalism. This essay will explore several economic and social-political issues which help identify the character of the political economic regime forming in Slovakia. It will begin by briefly analyzing Slovak development since the year 1989 with an emphasis on the last two years. Specific attention will be given to the basic conception of economic transformation. It will consider whether and how transformation has occurred, identify the principal interests involved, and evaluate their impact on the transformation. It will also explore the effect of these developments on privatization, monetary, fiscal, anti-monopoly, and social policies; on labor, capital, and money markets; and on the formation of an institutional foundation for sustainable growth.

Slovak economic success, this paper argues, has been accomplished because Slovak governments--including two headed by Prime Minister Vladimír Meèiar--have followed the essential liberal radical economic strategy they inherited from the Czechoslovak Federal Republic. The current Meèiar regime, however, has broken from the original transformation blueprint primarily in the areas of privatization and industrial policy where it has established a clientalistic regime that rewards political allies at the expense of the general population. These clientalistic structures, through their constant demands for privilege, wealth and power, now threaten the hard won fundamental macroeconomic success of the past seven years.

1. Brief Recapitulation Of Political Economic Changes From 1989-1994

The economic transformation of the ÈSFR initiated after 1989 was firmly rooted in neo-classical and monetarist schools of economic thought. Discussions in the first half of 1990 established a monetarist-based strategy of radical economic transformation. The strategy was similar in conception to policies implemented in Poland at the beginning of 1990 under the guidance of L. Balcerowicz. The principal priorities of the radical strategy were price liberalisation, thrifty monetary and budgetary policies, fast and extensive privatization, internal convertibility, and liberalization of foreign trade.

The radical strategy sought to ensure an economic system change within the shortest time period. Its goal was to establish macroeconomic equilibrium and strict competitive economic conditions that would alter the behaviour of microeconomic actors and thereby contribute to an improvement in macroeconomic efficiency, effectiveness and competitiveness. Macroeconomic equilibrium would be established by eliminating excesses of demand over supply and its attending perception of general scarcity. After a number of preparatory steps, reformers began to implement the strategy on January 1, 1991 when they liberalized approximately 90 percent of prices. Concurrently, the reformers substantially reduced subsidies and subventions for business actors, introduced a flat tax rate for profits, and introduced market criteria for commercial loans. In short, strict budgetary constraints replaced soft budgetary constraints with the intent of inducing a major change in the behaviour of business actors.

The process of price liberalisation succeeded in establishing macroeconomic equilibrium by approximately April-May 1991. During the four months prior, excess demand had pushed prices up by more than 50 percent. However, due to a restrictive monetary and budgetary policy, the price level soon stabilized, calming fears of an ongoing inflationary macroeconomic imbalance.

In addition to macroeconomic equilibrium, the radical strategy sought to establish internal convertibility and foreign trade liberalisation. Releasing controls on trade would help impose external competitiveness on the economy by raising the severity of the domestic economic environment. The step was intended to force indigenous businesses to adapt and restructure themselves for survival in a more competitive environment. Speedy and extensive privatization would help create the efficient ownership structures necessary to carrying out this transformation.

Trade liberalization and internal convertibility established a relatively severe and competitive economic environment for all business subjects. However, policy makers assumed that a substantial change of company behaviour would follow and that managers would take steps such as lowering costs, reducing wasteful employment and production practices, and improving quality. Moreover, they expected the macroeconomic effects of these behavioural changes to lag behind the establishment of macroeconomic equilibrium by one to two years. Development in this area, however, was slower than expected. The main reason was the slow process of privatization. Despite the introduction of severe competitive conditions, the high surplus of state property and low adaptability and inertial behaviour of many companies slowed the microeconomic transformation. There were a number of reasons for this phenomenon, including a lack of managerial talent, inertia in old ways of thinking, and old debts and burdens. Yet perhaps the most important factor was that managers did not have sufficient incentives to change behaviour. Indeed, despite much progress towards hard budget constraints, many continued to act as if the state would indefinately continue to absorb the costs of not changing behaviour in state-owned enterprises.

The authors of the economic transformation were aware of such pitfalls. Thus, in their planning, they incorporated a major role for voucher privatization, an innovative, "non-standard" privatization method. The chief benefit of voucher privatization was the possibility for faster privatization without enormous financial funds. It also allowed all interested citizens to participate--hence it was a form of mass privatization. Practical experience suggested that fast, large-scale privatization was not only a must for the rapid adaptation of microeconomic actors, but also a precondition for their successful and reasonable restructuring.

Preparing and launching large privatization took more time than was expected. This was chiefly because the registration of property before privatization required tremendous work. The legislative requirement to verify how the government acquired property took a particularly long time because of the great disorder of property registration inherited from communist times. Nevertheless, initial registration of citizens and investment funds for voucher privatization occurred at the end of 1991 and the beginning of 1992. Privatization using standard methods began in spring 1992 and the first wave of voucher privatization was launched in May 1992. In principle, the first wave was finished by the end of 1992. By that date, almost 30 percent of all privatisable property in Slovakia had been privatized.

By 1992, some signs of progress in microeconomic adaptation and hints of the birth of an economic recovery could be seen. These signs included, a reduction of unemployment in 1992 from 12.3 percent to 10.4 percent, a ten percent increase in construction, and a decrease of economic decline in each quarter of 1992.

On the other hand, 1992 also brought discontinuity in the institutional setting of the economic transformation. Elections in June led to the split of Czechoslovakia into two individual countries, the Czech and Slovak Republics. The main reason for the split, which took place on January 1, 1993, was the results of the election six months earlier. Polling brought to power parties with fundamentally divergent views on both a settlement of the constitutional status of the Slovak and Czech constituent republics and on the type economic transformation.

Even though the split was initiated without a referendum, and as a result of a covenant between the winners of the June 1992 elections, in hindsight, it appears that the split was both inevitable and expedient. Continued coexistence under the post-June distribution of political power would have only prolonged an agonizing situation--with a number of negative political and economic consequences.

Following the 1992 elections, the question of whether to continue with the prevailing mode of economic transformation rose to the top of the political agenda. Since its split with the ruling movement Public Against Violence (VPN) in April 1991, the election winner, Movement for a Democratic Slovakia (HZDS) had been the dominant opposition party. In the year leading up to the June 1992 election, HZDS sharply and fundamentally deplored the dominant conception of economic transformation. All major elements of economic transformation--restrictive monetary and budgetary policies, privatization and the voucher method, and internal convertibility and especially currency devaluation--came under sharp attack. HZDS deplored the basic liberal transformation concept. They argued that it was a Czech invention, created in the Czech environment for Czech conditions, and most importantly, inappropriate for Slovakia. HZDS also argued that the comparatively worse economic situation in Slovakia was due to the adverse consequences of the common model of reform, and not a consequence of communism's economic legacy. To support their case, they pointed to the relatively worse economic performance in Slovakia, including a greater decline in output, two to three times higher unemployment, and lower foreign capital inflow.

Despite its devastating criticism of reform, HZDS failed to propose a reasonable or complete transformation alternative--either before or after the 1992 elections. This raised economic uncertainty. Economists' predictions fluctuated widely depending on the salience they gave to two opposed scenarios. One scenario envisioned that the government would continue radical reforms despite the disapproval it expressed in the run-up to the election. At the other extreme, the government could live up to pre-election rhetoric and fundamentally revise reforms in all major areas. This second scenario would mean that government policy would include greater price regulation, a push for expansive monetary and budgetary policies, stricter limits on--or the abolition of--internal convertibility, slower or reversed liberalization of foreign trade, and a stop to privatization.

In reality, developments after June 1992 ran in between the extremes. Except for privatization, the government retained the reform strategy it inherited from the previous regime. No substantial reversals in price liberalization occurred until 1995. Indeed, the government liberalized prices of goods and services that had not been approved by its predecessor in January 1991. Yet government rhetoric remained suspiscious of reforms. Government officials even informed the press that they were considering reintroducing the administrative regulation of certain prices, especially of basic food. At the time, it seemed that the leaks were intended more to assuage public concerns with the negative development in living standards and real income than an actual statement of the intent to regulate prices.

Despite this, the government's policies remained liberal in character. It maintained--and even tightened--a restrictive fiscal and monetary policy. In absolute terms, the 1993 state budget deficit was higher than in the pervious year. But this was due more to the changing structure of costs and revenues following the split of Czechoslovakia than to a looser budgetary policy. Reasonable monetary and budgetary policy in the years 1993 and 1994 also produced a decline in inflation from 23.2 percent in 1993 to 13.4 percent in 1994. It also led to a decrease in the size of the state budget deficit as a share of GDP from 6.7 percent in 1993 to 5.7 percent in 1994. Finally, the government maintained internal convertibility, despite adopting several only-temporary provisions for solving problems in the balance of trade and payments, such as the compulsory postponement of payment for imports, an import surcharge, and requiring certificates on imports of food-stuffs from Czech Republic.

The most important drift from the original transformation strategy occurred in privatization. In 1993, privatization almost completely ceased. Over the year, a mere 1.29 percent of privatisable property was delivered from state hands. But at the beginning of 1994, HZDS chairman V. Meèiar accelerated privatization, mainly through direct sales methods to people in favour of his government coalition. Meèiar's favoritism in the privatization process contributed to the repeal of his government in March 1994. A ne wgovernment formed under Prime Minister Jozef Moravèik from a wide, left-right coalition of former opposition parties.

The Moravèík government abolished several of the privatization decisions of Meèiar's government that they found to be in conflict with the law. But their main goal in privatization was the preparation of the second wave of voucher privatization. The Moravèík government's mandate was limited in time because parliament had decided on early parliamentary elections at the end of September and beginning of October 1994. In September 1994, it began registering the public for participation in the second wave. 3.4 million people registered--almost all adult citizens of the Slovak Republic.

In conclusion, the transformation conception launched in 1991 in the former CSFR was followed in principle through the end of 1994. This period encapsulated both the break up of Czechoslovakia and four changes in government. Despite Meèiar's harsh criticism of the basic concept of reform when he was out of power, all four governments--including his--respected the system of priorities agreed in 1990. Thus, despite significant governmental disruption, there was substantial continuity on the essential question of reform direction.

2. Developments Under The Present Government Of V. MeÈIar: December 1994-Present

A period of coalition formation followed the autumn 1994 elections. Meèiar`s new parliament majority--consisting of Meèiar's HZDS, the Association of Workers of Slovakia (ZRS), and the Slovak National Party (SNS)--was at first content to rule from the opposition, leaving the Moravèik cabinet in place. On November 3rd and 4th, 1994, without even having formed a cabinet, the coalition took complete control over the public media and privatization process though majority votes in parliament (For more details, see Szomolanyi, in this volume). Since it was not clear at the time whether and how HZDS would decide to form a government coalition, the new majority decided to transfer responsibility for executing privatization decisions from the governmentally-accountable Ministry of Privatization to the relatively independent National Property Fund (NPF). The NPF is a quasi-private joint stock company set up in 1991 to administer governmental privatization decisions. The new legislation gave the NPF most of the government's decision-making powers. The government then fired the members of the NPF's top-executive bodies and replaced them with appointees loyal to the new coalition partners.

A coalition cabinet of HZDS, SNS and ZRS was finally named on December 15, 1994. Its first action was to put-off the pre-round of the second wave of voucher privatization. Meanwhile, the NPF proceeded with an extended privatization program of direct sales, often to companies with unknown owners.

2.1. The Government Program Declaration: in principle, continuity

The new government stressed in its program declaration its intent "to continue establishing a social-market-democratic area, compatible with the world's developed democracies." As its strategic objective, the government sought to "lay the foundations for achievement of levels of economic efficiency and living standards comparable with the developed European countries by the change of the millennium--not later than by 2010. [Enabling] full integration of Slovakia into European structures. In accordance with that, the government considers as its priority the acceleration of [the] transformation process" (Programové vyhlásenie vlády SR  1995).

The concrete aims of the government's Program Declaration were in principle compatible with the overall declared goals of the original transformation program. There were, however, three exceptions: First, the government stated its intention to shift from a restrictive to an expansive finance policy. Second, it called for an active sectoral industrial policy. Finally, it made major changes in the area of privatization.

The government's declared privatization policy bound itself to benefit domestic applicants for state-owned enterprises. Specifically, it sought to "create such ownership structures, in which a substantial share will consist of domestic businessmen and the employees of privatized companies." The government justified this approch by the need to "...establish the foundation of a participation economy," in which employees as well as managers would benefit from the fruits of privatization. Another discontinuous step in the Government Program Declaration was the intention to ensure "state interests in the privatization of strategically important enterprises," especially in, "energy, gas, telecommunications, water management, military production and banking." Beyond these exceptions, the Government Program Declaration was based on a continuation of the transformation course. (Programové vyhlásenie vlády SR  1995)

2.2. The rise of clientalism in Slovakia

While Meèiar's third government has by and large continued the macroeconomic transformation course, the significant shift of policy in the realm of privatization and sectoral industrial policy provided the space for a number of interest groups to benefit from close, mutually advantageous ties with the government. Clientalism is defined as the misuse of political power to ensure economic advantages for select groups within society. To the extent that economic power and political power are mutually reinforcing, clientalism practiced over a period of time risks development of plutocratic structures of economic and political privilege. Under plutocracy, political and economic powers are concentrated in the hands of narrow groups of political and economic elites who coordinate their actions to secure their continued privilege and influence over other actors in society. The following section describes the establishment and practice of clientalism in Slovakia under Meèiar's third government. A Later section shall assess whether there is a risk that a more putocratic system could develop.

2.2.1 Clientalism and Privatization

Privatization has been the dominant domain of economic transformation in Meèiar's third government. Domestic and foreign analysts and observers frequently assert that privatization concerns are the main bond holding the coalition together. The ruling coalition combines political parties as different as the ideologically amorphous, populist and charismatic HZDS, extremely left oriented, even neo-Bolshevik, ZRS, and the nationalistic, far right oriented SNS. The coalition appears to be more a relationship of collusion than one of cooperation.

The large scale and rapid pace of privatization, as well as the almost absolutely opaque and uncontrollable means being used to carry it out, are shaping the type of economic system forming in Slovakia. The process of privatization employs practices that are systematically eroding some of the basic values of the market economy. These values include: equality of opportunity, non-intervention, separation of political and economic power, equality before the law, and respect for the Constitution and laws. Perhaps as importantly, one cannot be sure that such practices will necessarily disappear with the end of privatization. Indeed, it seems likely that they may continue. Already, influential businessmen use clientalistic practices in areas outside of privatization. These efforts show signs of becoming standard practice in the future: Those who profit from clientalism today may want to profit later as well. First of all, it is lucrative. Secondly, clientalist supplicants are often unable to succeed in business under more competitive circumstances because they have never worked under such conditions.

Thus, it is useful to pay closer attention to the process of privatization and its influence on shaping the Slovak economic system. First, we will produce a brief recapitulation of major events in the process of privatization from late 1994 to the present. Later, we will give examples of some of the most important, cases of clientalism (For those interested in more detailed analysis and more complex survey of privatization cases, see Marcinèin 1996; Miklos 1995, 1996a, 1996b).

The most substantial mark of privatization during Meèiar's third government has been the near total influence of the managerial lobby over the reorganisation of the privatization process. The managerial lobby primarily consists of old management cadres from the era of "real socialism." From the beginning, they opposed both the voucher method and most foreign participation in privatization. Their chief concern was that these privatization methods where jeopardizing their chances of gaining control of privatized companies. In the past, these cadres, often called "old structures," were directly connected with the severe and rigid rule of the communist regime where an inevitable condition for any high-level managerial position was membership in the Communist Party nomenclature. Today, these same managers are organised in the Association of Employer Unions and Alliances (AZZZ). In the meantime, most of the former managers of large industrial enterprises have also become enterprise owners.

AZZZ has openly promoted most government privatization measures under Meèiar's third government, in particular, the abolition of voucher privatization and preference to domestic applicants (see AZZZ Declarations from 14.04.1995 and 20.06.1995 in Pravda , April 12, 1995, Slovenská Republika , June 6, 1995). AZZZ is open about its success in shaping government privatization practice. President Michal 1/4ach directly confirmed AZZZ's role when he announced that "the privatization philosophy assumed by government has been formulated jointly [with the AZZZ]" Slovenská Republika , June 21, 1995). In addition, all six ministers of economy have also held high positions in AZZZ.

Old structures supported Vladimír Meèiar as early as 1991 when he was in the opposition. They opposed a number of policies supported by the ruling government of Ján Èarnogursky: The utilization of the voucher method in privatization, equal conditions for domestic and foreign investors, and the "Lustraèny Zakon," ¹ threatened the position and privilege of old communist managers. Meèiar's opposition to these measures was well known in 1991. He thus acquired an important set of allies. Moreover, the economic power of industrial management was on the rise as the result of spontaneous privatization in which state managers would use various methods to transfer the assets of the state-owned enterprises they managed to private companies or other entities under their private control. This, in turn, enabled them to provide financial support to select politicians in the 1992 and subsequent elections.

The third Meèiar government's Program Declaration in January 1995 carefully inserted the interests of old structures into privatization policy. The Declaration supported measures to privilege domestic applicants over foreign applicants in the privatization process with the aim of establishing a domestic capital class. Foreign participation was allowed but only if "purposeful," meaning the government would only invite foreign participation where it was necessary to further Slovak economic development. At the same time, however, the Program Declaration committed itself to launching, "with no useless delay," the second wave of voucher privatization which had been prepared by the outgoing Moravèik government.

But what was the reality? "Purposeful" participation of foreign investors became almost no participation. Out of 367 privatization decisions in 1995, only 5 favoured foreign applicants. In 1996, foreign investors only won 2 of 400 decisions. The government also abondoned voucher privatization. In addition, the government also transferred primary responsibility for privatization to its quasi-private joint-stock company, the Fund for National Property. This rendered the remaining predominant privatization method - direct sales - almost entirely opaque and uncontrollable. Meèiar's government then used these direct sales to sell the most lucrative state property at a symbolic price to persons who were close to or identical with the top leadership of the government coalition.

The demand for cancellation of voucher privatization came mostly from the reluctance of the AZZZ to sacrifice any amount of property to a method over which they had no direct control. At the same time, both Meèiar and the old structures were afraid of the potential influence of "new structures," which were connected to voucher privatization, and which could have gained strength from the second wave of voucher privatization. New structures consist primarily of investment funds, investment corporations and brokerage firms-actors connected to the capital market. The term also reflects the personal relationships and biographies of these actors--they are mostly young people, untainted by collaboration with old regime. The first wave of voucher privatization and ensuing trade in the new capital market brought substantial profits to the most successful investment corporations, funds and brokerage firms, and an increase in their financial and political independence and economic influence. Because of the growing influence of these corporations--which Meèiar was unable to control--the government conspired with old structures to fight against the new structures.

Meèiar did not stop with cancellation of the second wave of voucher privatization. He also took steps to limit the influence of investment funds and corporations. In September 1995, Parliament approved the restrictive Investment Corporations and Investment Funds Act Amendment with the main goal of reducing the influence and power of these firms (for more details, see Miklos 1996b, p. 96). The act forced investment funds and corporations to function as portfolio shareholders--removing their representatives from supervisory boards. At the same time, it failed to ensure that portfolio investors would have adequate minority shareholder rights. The result has been to hamper the effective and reasonable functioning of portfolio investors.

Following the Act's passage, the president of Investment Funds and Investment Corporations Association R. Lachkoviè, responded that the amendment was a red light for voucher privatization, investment funds, and the capital market. He added that old structure company managers were mostly behind the attacks. Managers from many companies that were privatized in the first wave of voucher privatization were unhappy that large investments funds had overnight become their new owners. Significantly, the new investment fund owners interfered in management structures that had not been challenged for decades (Slovensky Profit , 28/1995).

Most investment corporations have tried to escape the negative effects of the amendment by transforming their funds into joint stock companies. The registration courts accepted the plenary assembly decisions of the funds, but the Ministry of Finance claims that the decisions are illegal.

Since 1995, Slovak privatization has moved even further toward open favoritism to small groups with increasing participation by the political elite. The trend is documented by several candid statements of top NPF and coalition parties' representatives. For example, former Minister of Economy and now CEO of the state run gas company, Ján Ducky, claimed that privatization to insiders is natural, "each government in the world gives to those who co-operate with it" (Trend , 40/1996). In addition, NPF Presidium Chairman and ZRS vice-chairman, stefan Gavorník, admitted that he knew about politicians of high rank among the new owners but added that he would not reveal their names. If he decided to write memoirs, he continued, he would be dead before finishing the first chapter (Pravda , January 1, 1997). Ví_azoslav Móric, the honorary chairman of coalition-partner SNS, and an indirect beneficiary of privatization through his wife, expressed himself even more clearly, writing, "fair privatization does not exist, we all know, that the only criterion is loyalty... The winner takes everything" (SME , Febrarury 29, 1997).

2.2.1.1. The case of PSIS

In addition to the wide-spread liquidation of investment funds, some funds were singled out for specific attacks. In 1995, the Ministry of Finance revoked the license of Prvá Slovenská Investièná Spoloènos_ (PSIS), perhaps the largest and most successful investment corporation. This corporation was the best in the area of mutual funds administration where it managed Slovakia's largest fund, Sporofond. Sporofond had resources of more than 2 billion Slovak Crowns (SKK) or 67 million USD deposited by more than 40,000 investors. ² At the same time, PSIS was poised to become the most successful investment corporation in the second wave of voucher privatization. During the pre-round of registration in Autumn 1994, as many as 800,000 out of 3.4 million voucher holders placed their vouchers in PSIS-created funds. This was easily the highest number of investment vouchers assembled by any one investment corporation.

At the end of 1995, the Supreme Court found the Ministry's action illegal and nullified it. But the Ministry of Finance refused to release the property of PSIS. At the beginning of 1996, it sent a new inspection team and once again revoked its license.

The PSIS case is important because it sets a precedent of failure to respect the principle of inviolability of private property. Moreover, the Ministry violated the principle for clear political reasons (for more information about the PSIS case see Miklos, 1996b, pp. 97-98). PSIS was a natural target. In addition to being controlled by new structures, PSIS was also a publisher of the most effective opposition daily, SME .

2.2.1.2 The sales of NPF capital shares

In 1996, Slovak MP for Democratic Union (DÚ), Viliam Vaskoviè, warned in parliament that the National Property Fund frequently uses illegal methods to sell shares through the capital market to selected buyers. In addition to violating the Large Privatization Act, these NPF sales cost both the NPF and the government hundreds of millions of Slovak crowns (SKK) in lost revenue.

According to the Large Scale Privatization Act, sales of shares on the capital market should be realised via auctions as they were in 1994 under the Moravèik government. A major axiom of this method was that all potential buyers are to be informed a reasonable time before the sale. The information should include where and how prospective buyers can apply for shares so the aunctioneers can generate an auction price that reflects market value. Nevertheless, since 1995, the NPF has generally given information about the time, volume, and minimum acceptable price of the auction to only one applicant, which then makes a purchase offer immediately after the initial sale offer of the NPF. So, even if the process runs through RMS (the provider of the market in non-blue chip stocks and bonds), in reality, it is a direct sale in which shares are being sold for symbolic prices that are far under the market prices that would be generated by normal auction methods. As V. Vaskoviè proclaimed: "A real suspicion exists, that through the sales of shares with the previously given buyer on a [RMS] counter, prices of those joint stock companies are being artificially lowered." He added that NPF had sold 151 companies in this manner. "[NPF] sold 1,044,631 shares valued at 1,044.6 million SKK, for 108 million SKK, or about 10 percent of the nominal price" (SME , March 30, 1996). Vaskoviè added that he asked NPF Presidium Chairman s. Gavorník to investigate these allegations but did not get any answer within a determined time period. He also announced his decision to take the case to court (SME , April 6, 1996).

One example of this form of privatization was the sale of a decisive share package of Turèianske Papierne, a.s. to the Slovak Hanco, s.r.o. for 352 SKK per share. Hanco, s.r.o. immediately sold the entire package to an Austrian investor for 1000 SKK per share. The net profit for Hanco, s.r.o. and the net loss for NPF was more than 34 million SKK (1.13 million USD) (Národná Obroda,  February 23, 1996).

2.2.1.3. The case of Nafta Gbely

Nafta Gbely, a.s., is one of the most prosperous companies in Slovakia. In 1995, its profit before taxes reached 1.075 billion SKK (35.8 million USD). In terms of profit as a portion of turnover in 1995, Nafta Gbely was the fourth most profitable company in the Slovak Republic. Its shares were the most lucrative on the Slovak capital market. At the end of July 1996, Nafta Gbely's market price was fluctuating between 2,236 SKK and 2,360 SKK per share while its nominal price was 1000 SKK per share. At the same time, the Strategic Companies Act of September 1995 placed the company on the "strategic" list--limiting its options for privatization of the NPF's 45.9 percent stake in the company. A wide spectrum of small and medium share holders had previously privatized 54.1 percent of the company's shares in the first wave of voucher privatization.

On August 1, 1996, the National Property Fund decided on the direct sale of its 45.9 percent stake in Nafta Gbely to an unknown company, Druhá Obchodná, a.s., for 500 million SKK (17 million USD). The first payment was 150 million SKK to be paid within 30 days. The balance was to be paid over the following 10 years according to a payment calendar. At the same time it was possible to invest these payments into the company rather than paying them to the National Property Fund--investments into the company are thus deducted from the purchase price. However, because Nafta Gbely generates more than 1 billion SKK (32 million USD) profits annually, the new owners could comfortably repay their debt to the FNM out of dividends (for a similar case, see the model of the Slovnaft, a.s. privatization in Miklos 1996b, p. 100).

Many domestic and foreign investors applied to participate in the privatization of Nafta Gbely, including such notable companies as Ruhrgas, OMV, and Gas de France. Yet, the NPF Presidium president (who is also, ZRS vice-chairman), stefan Gavorník, announced that the decisive factors in NPF's decision were price and the credibility and Slovak nationality of the applicant. (Národná Obroda , August 8, 1996) At the time of its privatization for the price of 500 million SKK, Nafta Gbely shares were trading on the capital market at 2200 SKK per share--this would put the trading value of the shares at 3.2 billion SKK (107 million USD). Yet because the 45.9 percent of shares sold represented a controlling package, the real market price would have been even higher (The remaining 54.1 percent of shares sold under voucher privatization are scattered among a large number of owners). Almost all domestic and foreign investors offered a much higher price than the winner. The direct loss on the sale to the Slovak government therefore reaches approximately three billion SKK (100 million USD.

As for the "credibility" and "domestic character" of the new owner, the media have revealed that the first registered residence of Druhá Obchodná, a.s. was actually an abandoned and dilapidated family house. Moreover, at plenary sessions of Nafta Gbely shareholders, the deputies and statutory representatives of Druhá Obchodná are small-time, local businessmen.

The Stock and Bonds Act Amendment, passed by coalition MP's at the end of 1996, may be closely related to the Nafta Gbely privatization--as well as to other privatization cases. Prior to the amendment, shares were registered in "dematerialized" form at the Securities Center by the name of the owner. From July 1995 until the passage of the amendment, the dematerialization and registration of shares was obligatory. The amendment attempted to eliminate this, which in effect would have allowed shareholders to hold their shares in "material" or paper form, outside of the Securities Center. Because material shares were not registered, the ultimate owners of firms are close to impossible to trace. Trade in materialized shares thus allowed ownership to be transferred without informing the public or minority shareholders of the change in control. The President vetoed the amendment, but Parliament then passed a modified version in December 1996 which enabled materialized shares for new companies and companies issuing new equity.

Shares of Druhá Obchodná, a.s are kept in material form. Under the ruling coalition's new legislation, the Securities Center may not know who is the real owner of the controlling package of Nafta Gbely shares. The real owners could be top representatives of the government coalition. The press has reported rumours that the owners are indeed, Parliamentary Chairman Ivan Gasparoviè, Parliamentary Vice-Chairman Augustín Marián Húska, governmental Vice-Chairman and Minister of Finance Sergej Kozlík, and a former close collaborator of Meèiar, Anna Nagyová. These individuals deny their participation in any privatization. Meanwhile, the statutary representatives of Druhá Obchodná a.s. admit they are not the real owners of the company, but refuse to give information about real ownership because it is a "business secret." Anther indirect indication about the interests of top representatives of HZDS in this transaction exists. The former spokesman for Parliamentary Chairman Gasparoviè recently told a journalist of Plus 7 Dní  that during the time when parliament was deciding on whether to revoke the parliamentary mandate of Parliamentary Deputy, Frantisek Gaulieder, for leaving HZDS, Gasparoviè was considering resigning his position. According to the spokesman, Gasparoviè received a telephone call which persuaded him not to resign, adding in front of witnesses, "And are you surprised when the deal is 3.2 billion?" (Plus 7 Dní , 8/97, page 16) ³

2.2.1.4. Grain and mills

The price of grain in Slovakia is subject to regulation and is presently lower than world prices. State subsidies compensate producers. Therefore, to prevent speculation, the export of grain is controlled by export licenses and limitations. In 1996, the ministries of economy and agriculture allowed exports exceeding export limits. This enabled export firms to generate substantial profits from buying at the subsidized price and selling at the world market price. Over 199.2 thousand tons of grain were exported in the scam. Again, political connections were evident. Some of the export firms were owned by close relatives of high ranking members of the two ministries (e.g. the wife of a State Secretary of the Ministry of Agriculture) and the ruling coalition parties (HZDS and Ro3/4nícka Strana Slovenska) (for more details see, Novy Èas,  October 2, 1996; Trend,  October 2, 1996; Národná Obroda,  October 3, 1996).

The illicit exports contributed to a domestic grain shortage. In April 1996, the grain stock of Slovakia's two basic producers and the Market Regulation State Fund was exhausted. As the supplies of State Material Reserves were sold, the mills of Pova_ské Mlyny Pies_any, which is owned by the father of Ivan Lexa, the second ranking official of HZDS and the director of the secret police (SIS), received 50 thousand tons of grain, while all other Slovak mills received together a total of 30 thousand tons of grain. State Material Reserves charged Lexa's firm 3600 SKK (120 USD) per ton, while the other mills paid the market price--which fluctuated around 5000 SKK (167 USD) per ton. The effect of unequal distribution of grain was that by June 1996, Pova_ské Mlyny Pies_any a.s. had an excess of grain lasting three months, while other mills had to be shut down for days and even for weeks. Similar methods of "regulation" of sales from State Material Reserves were applied to sales of rye, where Pova_ské Mlyny received between 15 and 18 thousand tons, while all other mills together received a total of only three thousand tons ( Hospodárske Noviny , June 12, 1996; Domino , 23/1996).

2.2.1.5 VS_

With annual sales of SKK 49.8 billion (USD 1.66 billion) and a gross profit of SKK 5.26 billion (USD 175.3 million), the East Slovakia Steel Company (VS_) Kosice was ranked by TREND Top 100 as Slovakia's number one firm in 1995. The strength and importance of the company is also demonstrated by the fact that in 1995 VS_ accounted for 11.6 percent of Slovakia's exports. VS_ is a wholly private company with majority stakes in the hands of top managers. Key positions among shareholders are occupied by Alexander Rezes, a Minister of Post and Telecommunications in the Meèiar Cabinet from December 1994 to April 1997, and by the current VS_ president, Ján Smerek. Alexander Rezes's 26 years old son, Július Rezes, is a VS_ vice-president.

These shareholders acquired their majority stakes as a result of preferential treatment by the NPF during the second and third Meèiar governments. In both instances, the prices at which they bought the shares were about half of the capital market price at the time.

VS_ controls several minor banks, e.g. Priemyselná banka Kosice, Dopravná banka, and Postová banka. Interestingly enough, the company acquired its majority stakes in the latter two banks from state-owned enterprises operated by the Minister of Transport, Post and Telecommunications, headed by Mr. Rezes. VS_ also has a significant holding in Slovenská pois_ovòa (SP). Significantly, Slovenská pois_ovòa retains a monopolistic position on the Slovak insurance market (78 percent in 1995) and at the same time acts as a strong shareholder in several medium-sized banks (Istrobanka, Po3/4nobanka). In 1996, VS_ also bought 20 percent shares in Tøinecké _eleziarne (a steel company) in the Czech Republic and paid SKK 1 billion (USD 33 million) for the purchase of the indebted Czech soccer club, Sparta Praha. Finally, in 1996, VS_ and associated companies gained a 40 percent stake over Investièná a rozvojová banka (IRB), one of Slovakia's three largest banks.

Under the Slovak Banking Act, a company, or several companies acting in unison, need NBS consent to attain a greater than 15 percent share in a bank. On October 2, 1996, the National Bank of Slovakia declined to grant its consent to the IRB take-over bid and required that VS_ reduce its stake to below 15 percent. The NBS ruling was praised by the International Monetary Fund mission which "welcomed the [NBS] decision to prevent an industrial company from taking over one of the largest banks of which it is a principal borrower" ("Správa misie Medynarodneho menoveho fondu," 1996).

VS_ president Smerek responded by saying that "even without NBS blessing, VS_ has other options to attain its goal." Smerek was dismissive when several political parties criticized this statement as a public attempt to bend the law. Instead, he accused the critics of "disliking VS_ and, apparently, disliking Slovakia's development."

On Wednesday, January 22, 1997, the IRB Supervisory Board dismissed five out of six members of the IRB Board of Directors, including President Jozef Tkáè. Representatives of companies directly or indirectly associated with VS_ voted in favour of the dismissal. Persons close to VS_ owners filled the positions. Most of them were inexperienced in bank management. The new IRB president, Vojtech Vranay is a relative of Alexander Rezes. Observers explain this open take-over of IRB by the unwillingness on the part of the former bank management to finance the expansive investment plans of VS_. There are, however, more than enough reasons for prudent behaviour as IRB has been carrying a heavy burden of old, classified loans, many granted to the energy sector which will be unrecoverable without government and tax payer help ("Správa misie Medzinárodneho menového fondu," 1996). ⁴

Recent developments underscore the growing concentration of economic and political power in the hands of Rezes and his associates. For over a year Alexander Rezes indicated that he was about to resign as Minister of Transport and Telecommunications citing his poor health (he recently underwent serious heart surgery). In January 1997, he said that his resignation was being delayed because he was unable to agree with Prime Minister Meèiar about his successor. He announced publicly at a press conference that he was sure his successor would be someone close to him. A situation in which an outgoing minister appears to have greater say than the prime minister in who will succeed him is, to put it mildly, unconventional. Meèiar has also attested to the remarkable influence of Rezes when he announced in a broadcast on February 2, 1997 that if the politicians would not respect the interests of economic sector, "the economic sector would always enforce its interests." Those politicians who fail to respect this principle, he added, will be reduced to the role of a puppet (Gasparko ) (Slovenská Republika , Febrary 8, 1997).

On January 29, 1997, the daily SME  reported that in December 1996 minister Rezes endorsed a 13.5 percent reduction of the transport tariffs paid to _eleznice SR s.p. (Slovak State Railways) by VS_ Kosice. A second source reported a 20 percent cut. This will enable VS_ to save between SKK 850 million (28.3 million USD) and SKK 1.5 billion (50 million USD) annually. _eleznice SR has long been losing money and their loss has been paid for by taxpayers through the state budget. Such a deal will only increase this burden.

Another form of political profiteering by VS_ owners is that the state budget is repaying a loan to build an iron ore processing factory for a VS_-Ukrainian joint venture, Krivoi Roh a.s.. Significantly, the government has a zero equity stake in this joint venture. VS_'s equity in the venture is paid being paid for by the loan. According to the most recent approved state budget, the cost to the tax payer in 1997 will be 597.4 million SKK (20 million USD) (SME , January 29, 1997).

On January 29, 1997, the private TV channel Markíza reported two additional instances of "unconventional" VS_ influence and business practice. One report was about alleged VS_ plans to privatize the most lucrative part of Slovenská plavba dunajská, a shipping company operating under the auspices of Rezes' transport ministry and on the official list of strategic enterprises. The second report said that the foremen and top managers of VS_ were being urged to join HZDS, and that this "recruitment" exercise was organised on site at VS_.

2.2.1.6 Devín banka

Initially established by production co-operatives and unions during 1993-1994, Devín banka became famous for its problematic management and unrivaled, at least by Slovak standards, growth of classified loans. At the beginning of 1995, however, Russian owners took an equity stake in the bank. They have since increased their holdings to a controlling share. Experience from the past two years also indicates increasing Devin banka influence on the government. After the new stakeholders helped appoint a new CEO, Karol Martinka. Martinka's closest colleague Tatiana silhánková became State Secretary at the Ministry of Finance, while his wife became a close associate of Vladimír Meèiar, replacing Anna Nagyová, his feared and influential personnel assistant. Anna Nagyová left Meèiar in the middle of 1996.

Devín banka's relationship with Russia became public knowledge after the bank was chosen to settle unpaid Russian debts through payments in material goods. The bank mediated the import of eight MIG 29 combat aircraft priced at about 6 billion SKK (200 million USD)--earning 296 million SKK (10 million USD) commission from the state coffers in the process. In response to the questions of opposition Member of Parliament, B. Schmögnerová, Finance Minister Sergei Kozlik explained that the commission was adequate given the value of the account settled by Devín banka. Kozlik added that the deal had saved the government budget 3.35 million USD on each of the eight MIG 29's. Schmögnerová asserted that "the unofficial whispers that Devín banka serves as a centre of former Russian secret police in Slovakia are beginning to appear in a new light" (Novy Èas , November 7, 1996). ⁵

Devín banka was involved in the privatization of the most lucrative and most famous Slovak baths, Slovenské lieèebné kúpele a.s. Pies_any (SLK). On March 23, 1996, the NPF managed the sale of 51 percent of SLK shares to SLK's employee joint stock company, Spoloènos_ Zamestnancov Pies_anskych Kúpe3/4ov (SZPK). The purchase price was 302 million SKK (10 million USD), while the nominal value was 1.6 billion SKK (53 million USD). The generally accepted view is that the real market price was higher than nominal price. SZPK was established and controlled by four members of SLK's top management. FNM decided in their favor despite the much higher price offered by the city of Pies_any. In addition, the Highest Control Bureau (HCB) charged SZPK with several legal violations incurred during its establishment (Pravda , June 3, 1996).

At the end of January 1997, 51 percent of SLK Pies_any was transferred from SZPK to the corporation Vadium Group, a.s. Bratislava, whose founder is Karol Martinka, CEO of Devín banka. One of the four co-founders of SZPK and the chairman of the SLK trade union, Tibor Krajèoviè, proclaimed in daily Pravda that he was shocked by the transfer and that he had been informed by the chairman of the SZPK Board of Directors that the shares were transferred "according to some appendix to the purchasing contract between NPF and SZPK, the existance of which I knew nothing." The SLK Pies_any employee team wrote a general letter to top Slovak government officials and administrators with the warning that the new owners want, "to sell majority of the bath's shares to its Russian partner" at the end of 1997 (Pravda , February 5, 1997)

In an additional case, on January 23, 1997, the government decided to establish an air transport company called Slovenské aerolínie, a.s.. Its share distribution will be:

Devín Group s.r.o (daughter company of Devín banka): 33.5 percent shares
a.s. Willi (a corporation with Russian capital): 28.9 percent
unspecified Slovak individuals: 34.2 percent
OKB Jakovlev: 3.2 percent

The project is based on the principle that Devín Group s.r.o. will be assigned by the government to settle Slovak receivables owed by Russia by means of civil planes. The aircraft will then be used by Slovenské aerolínie a.s.. In effect, a credit owed to the Slovak state will be settled by private Slovak firms with Russian majority-owners. Moreover, the aircraft transferred to settle the Russian debt will be used by a private Slovak company with a Russian majority stake (SME , January 17, 1997; Hospodárske Noviny , January 24, 1997).

On March 3, 1997, former chief of the Slovak Secret Service, Igor Cibula warned in a broadcast on Radio Free Europe (RFE) that, "Devín banka is not an ordinary banking institution. Through this bank Russian influence is being imposed in our country. I would like to highlight that this bank is linked directly to Prime Minister Vladimír Meèiar, and not only via Mrs. Martinková, who replaced Mrs. Nagyová. Mr. Meèiar has contact with the chairman of the Board of Directors of that bank--Mr. Gorotkov. Mr. Meèiar has intervened on behalf of the bank via Russian ambassador Mr. Zotov. I dare to conclude, Devín banka functions as a Trojan horse of Russian interests in Slovakia" (SME , March 5, 1997).

2.2.1.7. Control of the Privatization Process

Privatization is administered with virtually no political control. Opposition parties do not have delegates in National Property Fund (NPF) bodies ⁶ ; The highest state controlling bureau (NKU), has no right to monitor NPF, because according to law it is not a part of the state administration; The NPF does not hold press conferences; and other means of informing the public about NPF actions are extremely unsatisfactory. Information concerning the corruption and obscurity of privatization leaks out to public only through independent and opposition dailies with a limited number of readers; State-run television provides next to no information about privatization. ⁷ The information block on privatization may help to explain why there is insufficient public pressure on the government. The major part of the public is simply uninformed or intentionally misinformed. This, in turn, helps the government to misuse its power in the area of privatization, free from the threat of losing political support.

2.2.2. Revitalization

In February 1997, the Slovak cabinet approved an enterprise revitalisation bill which was passed by Parliament the following May. The stated objective of the bill is to deal with the issue of extensive insolvency, which Prime Minister Meèiar and Vice Premier Kozlík estimate to be about SKK 70 billion (USD 2.3 billion). Recent market analyses suggest that the insolvency issue is indeed very serious, with 50 percent of sampled enterprises affected by what is known as secondary insolvency and about 5 percent in the grips of primary insolvency. ⁸

The problem of insolvency in Slovakia is caused primarily by the absence of an effective bankruptcy system. Debtors enjoy an accounting and legislative status superior to lenders. A lack of prudential behavior--especially on the part of state-owned enterprises--has also contributed. Instead of dealing with the root causes of the problem, however, the Meèiar cabinet intends to implement a system that could be just another instrument of providing preferential treatment to a narrow group of like-minded entrepreneurs at the expense of the taxpayer and the majority of businesses without access to preferential treatment.

The revitalization scheme will be highly selective. There will be no legal objective criteria qualifying a firm for a revitalisation arrangement. Relevant decisions are to be taken by revitalization commissions, which will most probably be comprised of government appointed public servants and appointees from the most influential management and owner lobbies seeking to have their liabilities waived. ⁹ An enterprise under revitalisation will be exempted from bankruptcy proceedings and creditors will not be allowed to seize the property the firm pledged as collateral.

The cabinet seems intent on addressing a debt problem worth tens of billions by allocating a mere SKK 2 billion for this purpose in the 1997 budget. Nor do official documents available from the government suggest that there will be larger allocations in the years to come. If this is the case, then the best alternative means of reducing a firm's debt burden will be to alter the way credits and liabilities are taxed. At present, businesses that write off their uncollectable claims without a court decision are not allowed to deduct the claim from their taxable income. By the same token debtor firms must treat their waived debts as taxable income, thus increasing the base on which they have to pay taxes. It is probable that some enterprises under revitalization, mostly private ones, will be allowed to treat waived liabilities as non-taxable income, whereas their creditors will be able to treat written off claims as a deductible expense.

Thus, unless more significant amounts are to be spent on revitalisation (and there is no indication of that), the revitalization process will be largely confined to claiming write-offs and liability waivers. This approach would certainly benefit debtors, who will not have to pay anything, but will be less attractive to creditors who will be deprived of a chance to collect at least part of their outstanding claims. The government, operating through tax offices, the state budget, insurance funds and state-owned enterprises, is Slovakia's largest creditor. State-owned banks constitute another major creditor group. Debtors are primarily represented by enterprises, most of them privatized. Revitalization through tax relief therefore is simply another form of transfer payment from the tax payer to the privatized sector.

If past practice serves as an guide, an ulterior motive behind the revitalisation scheme may be to reduce the liabilities of firms with political ties to the ruling coalition. Disadvantaged creditors will be largely made up of state owned businesses where the government has enough clout to enforce such unprofitable transactions. The measures will lower state budget revenues, lower the revenue and aggravate the deficits of insurance funds, and exacerbate the primary insolvency of state owned enterprises, which, in the capacity of creditors, will be forced to write off their claims.

In advanced economies, insolvency is primarily addressed through the mechanisms of bankruptcy. Bankruptcy proceedings offer creditors some hope of a complete or partial recovery of claims. In Slovakia, the opposite approach appears to have gained prominence. Instead of making, at long last, bankruptcy proceedings more feasible and effective, plans are under way to further cripple bankruptcy mechanisms and replace them by an absurd new scheme. The effect is to establish one more potential means of channeling money from taxpayers and unprivileged entrepreneurs into the pockets of a narrow privatization-industrial lobby.

2.2.3. Other forms of clientalism

Clientalism and corruption are common place in Slovakia today. The Highest Controlling Bureau notifies parliament and the media about such cases without a major response from either the ruling coalition or the general public. Abuses that continue include:

a) Evasion of the Public Acquiring Act, requiring that all state assets are sold by public tender: Managers of state owned firms frequently misuse their position to enrich their own private companies. ¹⁰

b) Political manipulation of government grants to local self-governments: Slovakia's system of public administration is highly centralized, particularly in the relationship between the administration of state government and local self-governments. There are no regional self-governments and responsibility - especially for public financing - is centralised in the government administration. Local self-government subsists on minimal grants, minimal local fees and taxes, and an insufficient share of central taxes. Another factor is the unclear and unregulated criteria for providing several kinds of grants from the state funds and the state budget. This money is often given to mayors with a pro-government coalition orientation. It is possible that without a change in mayor, a town may be unable, for example, to finish a water aqueduct in a village (for more details see Miklos et. al. 1996; Krivy, in this volume). ¹¹

c) Abuse of ministerial power: Another example of clientalistic creativity is the way in which SNS has used its clout at the Ministry of Defence (the minister is the SNS's, J. Sitek) to favour banks close to SNS. The army had decided to pay salaries by bank transfers directly into the accounts of employees, using the services of Prvá komunálna banka (PKB). The chairman of the PKB Board of Directors is the chairman of SNS Ján Slota, who is also one of the PKB owners (at the same time he is a mayor of the city of _ilina--the residence of PKB). Employees are allowed to select another bank, but the payment nevertheless goes first to a PKB account where it is then distributed to individual employee accounts at other banks. The result is that those who have other bank accounts will have their payment delayed for several days (Pravda , February 20, 1997).

d) Bias in tax policy: In 1995, Parliament passed an amendment to the Income Tax Act. It enabled business actors participating in a direct sales privatization project to deduct the money they reinvest into their companies from the purchase price and their tax base. This amendment favours those who privatized in direct sales (mostly entrepreneurs close to the coalition) above all others who cannot deduct their investment from the taxable base.

e) Bias in export policy: Parliament approved the Export Promotion Fund at the end of 1996. All importers and exporters have to contribute 0.1 percent of their export or import turnover to the fund, while the use of the finances is determined by the Fund Board of Directors. The Fund Board consists of the bureaucrats and delegates of the largest companies. In many cases board members are also company owners. Again, there is a real threat that the board will manipulate the Fund to directly or indirectly benefit the firms represented in the Fund bodies (primarily large companies) at the expense of small-sized and middle-sized ones.

f) Bias in import policy: At the beginning of 1997, the Ministry of Finance issued an exemption liberating high-technology equipment from import duties. However, the definition of "high technology" is vague, referring to "equipment, whose parameters reach the high technical-economic [level]of the finalized products." The obscurity of the definition is compensated by the procedural requirement that the application for duty abolition has to include a certification, signed by the minister, that the imported product is high technology and in accordance with the intent to advance the development of a particular industrial branch. In addition, to be eligible for exemption, the import bill must exceed 50 million SKK (1.66 million USD). In sum, the duty exemption is another channel through which clientalism and corruption might continue to thrive. It is also an additional example of discrimination against small firms that do not meet the minimal 50 million SKK limit. And finally, it is evidence of the fact that instead of a liberal industrial and structural policy, the government has decided on a sectoral industrial policy in which bureaucrats rather than the market choose which sectors have the most promising prospects.

g) Bias and waste in government purchases of goods and services: Finally, discrimination can be found in state orders and the orders of state firms. For example, the government decided that state institutions must only advertise in the pro-government private daily, Slovenská Republika . State monopolies, such as Slovenské elektrárne or Slovenské telekomunikácie, use Donar, an advertisement agency close to the government, to organise expensive and unreasonable advertisement campaigns whose only purpose is to transfer funds from monopolies into the coffers of private businesses and their politically connected owners.

2.3. Legislative action that violates market principles

This section briefly evaluates two acts from 1995 which fundamentally fail to conform with the successful conduct of market practice. There are a number of reasons justifying speculation that some of the motives behind each act stem from the desire of the ruling coalition to retain control over the economy and businesses. Regardless of the motives, both acts could potentially constrain the transformation towards markets.

The Pricing Act : 95 per cent of prices were liberalised on January 1, 1991. Since then, the prices of additional goods and services have been liberalised and currently, 97-98 percent of all prices are estimated to be free. At present, price controls still apply to electricity, heating, water and gas for households, rent and passenger bus and railway transport. Although these controlled items are small in numerical terms, they constitute a significant component of the consumer basket and their deregulation is a politically sensitive issue.

Against this background, the Pricing Act, approved by Slovak parliament in November, 1995, came into effect in April 1996. The law is extremely problematic, controversial and likely to cause considerable complications in the future. It introduces the poorly defined notions of "justifiable costs" and "reasonable profit" and makes it obligatory for all businesses to keep special records of their costs and profit as well as to make them available to inspection authorities to check whether costs are justifiable and profits reasonable.

Under the law, prices are reviewed by the Finance Ministry, local governments, tax authorities, and the Slovak Commercial Inspection. Officers of these bodies are appointed to perform price checks and are authorised to enter the premises of businesses, examine their documentation and require them to furnish data and meet other requirements necessary to perform such checks. On finding violations of the Pricing Act, inspectors may impose a fine of up to SKK 1 million (USD 33,000), or up to SKK 2 million (USD 66,000) if the violation is repeated. Alternatively, inspectors may initiate a procedure to revoke the business licence.

There are a number of problematic features to this law. Procedures to identify "justifiable costs" and "reasonable profit" as well as the details and structure of pricing records is stipulated in a regulation to be released by the Finance Ministry rather than directly through legislation. Nor does the law distinguish between liberalised and controlled prices, introducing the possibility of controlling already liberalised prices. In particular, there is a provision according to which a buyer and seller must not agree to an unreasonable purchasing or selling price when there is a temporary imbalance in the supply of, or demand for, a particular item on the market (§ 12, Sect. 1a). Obviously, decisions will depend on the ministerial and other examining officials who will decide on whether, where and when there is temporary imbalance on the market.

As of this writing, the act is fortunately not being implemented. But one could speculate about the motives behind the act. One possible motive might have been a genuine, although naive, attempt on the part of ministerial officials to deal with market imbalances and prevent unreasonable price rises. The problem, however, is that this objective will certainly not be served by the methods envisaged by the law. Inadequate price flexibility in Slovakia's economy is not due to price liberalisation but to an insufficiently developed competitive environment. This is where solutions need to be sought for the market imbalance problem--not in price controls.

Another, more cynical motive for introducing the Pricing Act may have been to put in place a versatile instrument whereby the governing coalition can ensure its control over all businesses--including private and privatized enterprises. Government influence over the economy should diminish as it becomes privately owned, but the Pricing Act could be a good means of ensuring that enterprises remain both private and docile. In 1996, the World Bank mission issued a memorandum critically reacting to the act: "The Pricing Act is a real potential threat for competition, and even for domestic companies as well as foreign investors" (World Bank 1996, p. 18).

The State Strategic Interests Guaranty in the Privatization Act : The "State Strategic Interests Guaranty in the Privatization of Strategically Important State Companies and Joined Stock Corporations Act" was enacted in September 1995 and has power over 74 companies and joint stock corporations with total assets valued at 150 billion SKK (USD 5 billion). These companies generated up to 90 percent of all non-financial sector profits in 1995.

The act defines two groups of strategic companies. The first group includes 27 state companies and two joint stock corporations whose property or shares cannot be subject to privatization. The second group consists of 45 state companies and joint stock corporations which can only be privatized within a special regime in which the state guarantees its interests through a "golden share." The golden share is a share with special rights that will be issued by means of a transfer of stockholders' rights from the NPF to the founding ministries. The act also empowers the government to request the NPF to transfer its shares in joint stock companies--even those that are not on the strategic companies list--to the founding ministries.

The Constitutional Court abolished the golden share provision. Thus the strategic interests act is only being partially applied. For the present, it is in effect among the first group of enterprises that are barred from privatization. But even before the Constitutional Court ruling, the state had difficulty implementing the golden share provisions among the second group. Perhaps the most outstanding example was at Slovnaft, a.s., where the largest private stakeholder, and even the representative of the NPF, voted against including the golden share into Slovnaft statutes. They argued that neither in the act, nor anywhere else, were "the criteria which jeopardise, or could jeopardise, the state's strategic interests" defined clearly enough. Under these criteria, the state would be able to claim its special rights as holder of the golden share.

Other companies entirely ignored the law. The law states that transfers of shareholder rights to founder ministries should have taken place by November 14, 1995, but in many cases no transfer occurred. On the contrary, in some instances the shares of "strategic" companies were fully or partially privatized. ¹² In the case of Nafta Gbely, a.s., the plenary assembly included the golden shares into their statutes after the Constitutional Court published that the golden share provision was unconstitutional. At present, the part of the act that is obeyed deals with about 29 companies and joint-stock corporations exempt from all privatization. The companies are in energy, telecommunications, railroads, arms production, forests, rivers and pharmaceuticals.

In February 1997, the group of non-privatizable enterprises was enlarged to include the four largest financial institutions owned at least partially by the NPF. ¹³ Under the original enlargement legislation, these shares would not be privatized until 2003. The opposition sponsored and passed the bill in temporary alliance with ruling coalition partner, ZRS. ZRS's coalition partners sharply resented its defection. At a casual glance, opposition support for the bill was a paradox: The opposition has repeatedly criticised the Strategic Interests Guarantee Act. Through their co-operation with ZRS, however, they hoped to prevent the four financial institutions' acquisition by groups that are both close to the government and some of the largest debtors of the financial institutions they were trying to acquire. By defecting form the coalition, ZRS hoped to restore its waning popularity among workers, but it could also be understood as a retaliation for the HZDS decision to remove ZRS deputies from the boards of some financial institutions. A month after its independent stand, however, several members of ZRS, including its chairman, Ján 1/4upták, supported a revised amendment which allowed the privatization of IRB and VUB.

3. Institutions And The Future Macroeconomic Performance Of Slovakia:

Slovakia's macroeconomic success has been firmly routed in the liberal economic reform policies in place for close to seven years. Ongoing challenges of transition, clientalistic practice, and the emergence of almost plutocratic forms of economic and political organization, threaten that success. This section analyses the degree of liberalization already achieved by the Slovak economic system and attempts to outline the prospects of the system into the future. It is based on data from the Heritage Foundation and The Wall Street Journal  in their common annual publication, The Index of Economic Freedom . Table 2 indicates Slovakia's comparative ranking over the last three years:

Table 2: The Economic Freedom Index of selected countries

1997 Rank	Country	1995 Index	1996 Index	1997 Index
1.	Hong - Kong	1.25	1.25	1.25
2.	Singapore	1.25	1.30	1.30
12.	Czech Republic	2.10	2.00	2.05
25.	Estonia	2.25	2.35	2.35
64.	Hungary	2.80	2.90	2.90
69.	Latvia	-	3.05	2.95
77.	Slovakia	2.75	2.95	3.05
80.	Lithuania	-	3.50	3.10
83.	Slovenia	-	3.35	3.10
85.	Poland	3.25	3.05	3.15
98.	Rumania	3.55	3.70	3.40
108.	Bulgaria	3.50	3.50	3.60
117.	Russia	3.50	3.50	3.65
128.	Belarus	3.65	3.55	3.85
135.	Ukraine	3.90	4.00	4.05
150.	North Korea	5.00	5.00	5.00

Source: "The Index of Economic Freedom," adopted from Transition , The World Bank, Volume 7, December 1996, p. 23

The index of economic freedom is an arithmetical average of grades assessing the extent of economic freedom reached in ten economic realms. "1" is the highest practicable extent of economic freedom while "5" means absolute economic illiberality. The authors ranged individual countries as follows:

Table 3

index	zone
1.00 - 1.99	liberal
2.00 - 2.99	largely liberal
3.00 - 3.99	largely illiberal
4.00 - 5.00	illiberal

While one should not overestimate the utility of such pecking orders, Table 2 indicates that over the last three years, the Slovak Republic has had the greatest deterioration in its combined score (0.3) of all countries in the chart. It is followed by Belarus (0.2), Russia (0.15) and Ukraine (0.15). The slip in the index is symptomatic of the problems of transition as complicated by a drift towards a clientalistic concentration of political and economic power in the hands of a small ruling elite. ¹⁴ The following section provides a brief analysis and prognoses based on a selection of the ten economic measures of economic liberalism:

Ownership rights : Slovakia's relatively decent record in ownership rights is threatened by clientalistic practice and rising plutocracy. Slovakia received a 2 in 1995 and a 3 in 1997 in the area of ownership rights policy. This is increasingly emerging as one of the most problematic spheres of Slovak policy. The problems fall into two categories. The first directly relates to the means of establishing new owners. Due to the opacity and corruption of the privatization process, current structures of ownership lack the same legitimacy as ownership structures abroad. Owners are insecure and thus more likely to prevail upon illegal or marginally legal methods and clientalistic ties to protect or increase their assets. Moreover, new owners are used to operating in an environment where the boundaries between legal and illegal actions are murky and frequently crossed. They may thus prefer to continue to work in such an environment--particularly if it either works to their advantage or they are unsure about how to succeed in a more transparent legal environment.

The second category of ownership rights violation has been the campaign of "old structures" to restrict the influence of "new structures," discussed earlier. Again, old structures have relied upon ties with the ruling coalition to achieve their ends. The Slovak government illegally disturbed ownership rights, most notably in the case of PSIS, but also in the broader attack on the property of investment companies. These firms registered to acquire investment funds during the pre-round of the second wave of voucher privatization in autumn 1994. They subsequently lost billions of SKK after the new Meèiar government, under the pressure of "old structures," abolished voucher privatization, and destroyed the funds' value almost overnight. The impaired investment funds included many foreign, mainly Austrian, firms.

The courts and bankruptcy procedures are an additional impediment to full ownership rights. Ownership rights are particularly endangered by the inefficiency of the court system. Courts are overcrowded and judgments may take years to process. Meanwhile, court decisions are occasionally ignored by state bodies. The contemporary asymmetric relation between creditor and a debtor in the Slovak Republic is also problematic. Debtors are highly favored over creditors with the inevitable result that the creditor's property rights are limited. The problem is closely connected to the inefficient bankruptcy process. Prior to the end of 1996, the courts received around 4000 suits for bankruptcies. As of this writing, however, the courts have sucessfully completed only two cases (The World Bank 1996). Yet instead of lubricating the bankruptcy process, industry and its government supporters have taken steps to protect strategic companies, state companies, and companies that will potentially be selected for "revitalization" from the full force of the bankruptcy law.

Ignorance of Slovak laws as well as poor market and human ethics also undermine property rights. The Slovak government and highest state officials frequently break laws and violate ethical norms. The best example is perhaps the alarming number of purportedly anti-constitutional legislative regulations passed by the contemporary Slovak government coalition over the past two years.

Regulation and corruption : In the realm of regulation and corruption, Slovakia received a 2 in 1995 and a 3 in 1997. The grade of 3 is unfairly optimistic. During the last two years, corruption and clientalism in Slovakia have become endemic. The selection of winners is based not on market competition but on a direct or indirect abuse of state power--and instances of this abuse have grown rapidly. Corruption developed first in the privatization process but is extending into almost every other economic and non-economic sphere.

Corruption and clientalism are typical problems in all transitional countries. However, in contrast to it's V-4 neighbors, clientalism in Slovakia is planned and organised at the highest state levels with the express goal of gaining and maintaining uncontrolled and unlimited political and economic power.

State consumption and competencies : In 1995 and 1997, the Slovak Republic received a grade 3 in the realm of state consumption and competencies. State budget expenditures were about 33 percent of GDP in 1996. In reality, however, the ratio was higher, since the figure excludes local budget expenditures, state funds expenditures, and the expenditures of obligatory insurance funds. Indeed, state funds financing is increasing due to expanding state investments.

As the privatization process proceeds, government competencies should be proportionally reduced. However, for a number of reasons, the reduction of government has not been proportional to private sector growth. The main reason for this has been the fusing of political and economic powers in a rising plutocracy. Legislation has played a key role in the continuing strength and size of government. Particular laws include the Price Act and the Strategic Enterprises Act, as well as others.

Bank policy:  Slovakia's bank policy received a grade of 3 in 1995 and 1997. Slovakia possesses a rigorous commercial bank licensing system and the Slovak National Bank strictly controls commercial bank activities. Strict control over bank activities is necessary, given the specific problems of the transition process. However, it would be useful to liberalize and increase the transparency of the current commercial bank licensing system. Political criteria play too large a role in the process of commercial banks licensing.

The principal problem of Slovak commercial banking is the high share of the market possessed by the largest state banks as well as the preponderance of problematic, non-classified credits and loans in their portfolios. ¹⁵ The bad debt largely from the communist era and early 90's. Yet, the main risk to the future of commercial banking in the Slovak Republic is the potential that banks' largest debtors will succeed in their efforts to capture control of their creditor banks. The Meèiar government's attempt to use this method of privatization on behalf of its large corporate patrons, particularly VS_, threatens to bring the banking system to a point of collapse. The organization warned against such efforts in its October 1996 report. The IMF referred implicitly to the joint-stock company, VS_ and the bank IRB. As mentioned above, VS_ captured its creditor bank, IRB, despite NBS disapproval. ¹⁶

It will be more difficult to create conditions for bank sector recovery and restructuring without the participation of foreign investors. Parliamentary opposition has tried to prevent the privatization of banks by their debtors by blocking the privatization process until 2003. They have only partially succeeded. It is not, of course, the best solution, but the opposition argues that it must be better than to leave the largest financial institutions in hands of their debtors.

Trade policy : The principal assessment criterion of trade policy is tariff rates and non-tariff barriers. The index of economic freedom gave the Slovak Republic a grade 2 in 1995 and the same grade in 1996. The Slovak Republic essentially has a very low level of tariff and non-tariff foreign trade barriers. In 1996, state revenues from tariffs, including an import surcharge, made up only 2.95 percent of the value of total imports and only 1.7 percent of GDP. The average tariff rate in Slovakia is about 5.5 percent. Slovakia is a highly open country with a high ratio of foreign trade to GDP. In 1996, the sum of imports and exports was approximately 104.7 percent of GDP; exports represented 46.7 percent of GDP.

Recently, Slovakia's openness has come under fire. In 1996, the balance of payments deficit reached SKK 64.537 million, or about 11.1 percent of GDP. The deficit has continued to grow in first months of 1997. Pressure is thus mounting to consider adopting administrative anti-import provisions. But prospects in this sphere are not good. The competitiveness of the Slovak economy is not improving fast enough. Due to a combination of minimum foreign investment, a non-existent bankruptcy procedure and a number of other reasons, Slovak firms have failed to restructure and revitalize. Slovak exports largely consist of low tech, low value added production distinguished by price competitiveness. However, even low wage costs are rising. In 1996, for example, industrial productivity increased by 2.5 percent while real wages rose by 8.4 percent. Slovak competitiveness is also suffering from hidden revaluation--the consequence of higher domestic inflation at a fixed exchanged rate of the Slovak Koruna.

The current account deficit is not being compensated by a capital account surplus. As a result, foreign exchange reserves are in decline leading to the expectation of either devaluation or administrative anti-import provisions. In May 1997, the Slovak government approved obligatory import deposits in which importers must deposit 20 percent of the value of their imports to a bank for a period of six months.

Taxation : In 1995 and 1997, Slovak Republic received a score of 4.5 on the Economic Freedom Index reflecting its very high tax burden and its damaging effects on economic development and economic initiative. Slovak income tax rates increase progressively from 20 to 47 percent; the corporate tax rate is 40 percent, the value added tax rate is 23 percent (although on some selected products, mainly food, VAT is only 6 percent), and social contributions equal 50 percent of payroll costs. According to information from the Slovak Chamber of Industry and Trade, the tax burden of private enterprises, measured by a complex tax quota, grew from 36.8 percent in 1993 to 45 percent in 1996. This compares to an average level of 38.7 percent in OECD countries (Slovensky Profit , 6/97). In addition, the Act on Foreign Trade Support adopted at the beginning of 1997 obliges that exporters and importers make additional contributions to the foreign trade fund.

Since 1995, the internal state debt of the Slovak Republic, both in direct and indirect debt, has grown rapidly. Direct debt has increased mostly through the growth of the current account deficit, as well as fiscal deficit growth (consisting primarily of the state budget, insurance funds, and local budgets). An additional problem is that social and security insurance contributions (50 percent of income) are too high. The Slovak government has not started yet to think about replacing its untenable pay-as-you-go pension financing with fund financing (see Miklos 1996c). Also looming on the horizon is the need to pay out NPF bonds as they mature. With a principal value of SKK 35 billion it appears doubtful that the NPF will have the resources to repay the bonds. ¹⁷ Items contributing to the indirect internal debt include delays in the liberalisation of electricity, energy, water, gas, and housing prices.

Future tax burdens will remain high largely because of growth in public state expenditures for state administration and public investments (highways, dams, a nuclear power station, etc.). By contrast, public consumption, mostly on medical care and education expenditures, is growing in a way that can not be sustained in the long term--threatening social concord. Halting internal debt growth will be the largest obstacle to lowering the tax burden in Slovakia. If anything, debt growth and hence a heavier tax burden, seem likely to continue.

Monetary policy : Slovakia earned a grade 3 in Monetary Policy in both 1995 and 1997. Since the main criterion in this sphere is the inflation rate, this ranking seems unjustifiably high. In 1995-6, the Slovak Republic maintained the lowest inflation rate of all European post communist countries in transition. And while the inflation rate in the Czech Republic was higher than in the Slovak Republic, the index awarded the Czechs a grade of 2 in 1997 (For an international comparison, see Table 1).

The Slovak Republic owes it success in fighting inflation to the responsible policies of the Slovak National Bank (NBS). However, maintaining this performance into the future is questionable. The problem lies in the growing discrepancy between an expansive of fiscal policy and a restrictive monetary policy. Tension between the Slovak government and the NBS is growing as well, which has resulted in government attepts to limit NBS independence and raised the concurrent threat of monetary destabilisation and higher inflation. In 1996, inflation was 5.4 percent. It is probable that inflation will be higher in 1997.

A newly established EXIM Bank, founded by a special act at the end of 1996, could also undermine the independence of NBS monetary policy. The EXIM Bank is not subject to NBS surveillance. Rather it falls under the jurisdiction of the Ministry of Finance. There is thus a real threat that the bank will become a means by which Finance might channel money into the economy. The threat is larger due to the discrepancy between the expansive interests of Ministry of Finance and the restrictive intents of the NBS. In October 1996, the IMF Mission to Slovakia expressed its disapproval of the EXIM Bank in a memorandum, "The mission is anxious abut the plans to enabling a specific role for the EXIM Bank, which should be created in the next year, in surveillance and monetary control. The mission is not familiar with any country where such an institution would have such roles and it firmly argues against the realisation of such plans" (Medzinárodného Menoveho Fondu, 1996).

Foreign investment : Slovakia's score in the area of foreign investment has fallen from a 2 in 1995 to a 3 in 1997. Indeed, poor foreign investment is one of the most evident weaknesses of the Slovak Republic. Slovakia has the lowest volume of foreign investment among neighbour post-communist countries. Moreover, there is no improvement expected. Between 1994 and 1995, foreign direct investments in all post-communist countries as a whole doubled. By contrast, in Slovakia the volume of capital inflows in 1995 was lower than in 1994 (19.3 million USD foreign investment increase in 1994, versus only a 17.8 million USD increase in 1995). Slovakia's poor showing is due mainly to discriminatory privatization practices, an unfavourable political image abroad, corruption and indifference in the state administration, and Slovakia's unpredictable political and economic prospects.

Domestic owners were originally expected to try to sell their new enterprises to foreign investors at market prices. The situation, however, has not significantly changed. Low prices alone cannot attract a sufficient number of foreign direct investors while market uncertainty and the lack of protection of minority stockholders rights have kept most portfolio investors out of Slovakia.

In its memorandum of October 1996, the IMF highlighted the connection between the low foreign investment and privatization methods, stating that "the vagueness of the privatization process deters potential foreign investors from investing in the SR to [the same] extent as in other Central European economies in transition and thus the SR fails to take advantage of foreign know-how and capital inflow." (Medzinárodného Menoveho Fondu, 1996)

Summary : Slovakia's positive macroeconomic results are primarily the consequence of effective liberalization policies. Yet, we have also seen that clientalism and the emergence of some hints of plutocratic rule are producing economic policies that are undermining conditions for the long-run maintenance of positive macroeconomic success. Complications include, uncontrolled, interconnected and concentrated political and economic power; a disregard for laws and rules; constant challenges to the principles of the free market; legislation that blatantly contravenes the principle of equity on behalf of small groups at the expense of majority; the determination of winners and losers by government fiat; growing corruption; and finally, the centralization of public administration and the inaccountability of government bureaucrats and its clients. As these limitations reach a critical level, they will sooner or later diminish the competitiveness and efficiency of the economic system. The end result will be a growing lag behind countries with an institutional base in liberal values.

Both theory and experience show that institutional provisions determine whether a country utilizes its potential or stagnates. Mancur Olson argues that "income per capita is determined more by the institutions and policy chosen by a particular state than by natural resources or initial scarcities. Poor countries which decide on good institutions and policy can realize economic growth more rapidly than rich ones." Olson concludes that large profits "are achievable in a place, where institutions which enforce contracts indifferently and which are able to ensure ownership rights, exist.... Primarily, it is the structure of stimuli which defines economic performance" (SME , Feb. 28, 1997).

4. What Kind Of Regime Is Developing In Slovakia Seven Years After The Breakdown Of Communism?

Returning to the question raised in the introduction, we can conclude that Slovakia does not possess Singapore's combination of political authoritarianism and economic liberalism. Rather, Slovakia's current regime employs semi-authoritarian political methods and retains a clientalistic economic system. There is also a signifcant threat of an emerging plutocracy. Slovak economic development is moving two opposite directions. First, it has the basic institutional forms of a western-type, open market economy, including: a growing private sector, an open economy, increasing association with the EU, capital market institutions, and reasonable fiscal and monetary policies. Yet, there has also been significant movement away from western market institutions and practices. This movement--characterized particularly by flourishing clientalism and the interconnection of political and economic power--have ensued mostly from the effort of Prime Minister Vladimír Meèiar and his allies to preserve power. The ruling coalition and its allies are tailoring a pragmatic economic transformation policy to meet their own demands at the expense of many of the basic values and norms of market economics and democracy. The government's behaviour threatens an irreversible erosion of institutions and practices typical of an open economic system in the West. Perhaps most importantly, economic and power concerns have led to the cessation of institutional changes essential to a successful transformation.

There is a threat that government policy is leading towards the "russification" of social and economic relations in Slovakia. Russification has two meanings here. First, it refers to the system of relations which is emerging in contemporary Russia, where the wealth and power prerequisites of the ruling elites create an advanced clientalistic, almost plutocratic, state in which the essential legal and institutional structures of the economy are residual; a place where real political and economic power, including the power to shape and/or ignore the institutional framework, is in the hands of large monopoly managers and the mafia. This system was perhaps best described by Russian Liberal Party chairman, Grigorij Javlinskij, when he told Financial Times  on January 31, 1997, "The new governing elite is neither democratic, nor communist, it is neither conservative, nor liberal, neither red, nor green. It is only avaricious, insatiate and gluttonous. It cannot solve social and economic problems--but only those which result in their own economic power and wealth." ¹⁸ Under such conditions, it is likely that attempts to restructure the Russian government and the economy will inevitably run afoul of the inertial resistance of these entrenched interests.

The second meaning for russification is the threat of penetration and enforcement of Russian official and unofficial, political, economic and military interests in Slovakia--including the economic and political influence of semi-criminal and criminal elements. ¹⁹

Recent political, military and economic agreements between Slovakia and Russia attest to the growing ties between the two countries. There is a growing risk that as Slovakia's new political and economic elites seek to maintain power at all costs, they will isolate themselves from Western structures and become increasingly dependent on and beholden to Russian interests. Perhaps most alarming is the risk that features of the Russian political and economic system will reproduce themselves on Slovak soil.

One of the characteristic marks of Russian reality today is the disproportionate concentration of political and economic power in hands of a narrow group of people. Rem Viachirev, the president of GAZPROM (which is today private and probably the richest company in Russia), clearly expressed himself on the topic: "Everyone who gains power has to arrange its relation with GAZPROM, because without GAZPROM he would arrange nothing" (as quoted in Duleba, 1997; Rutland 2/9). As Berezovskij, the owner of a state-wide Russian TV network who now holds the position of vice-secretary in the Russian Security Council, announced, "I, together with six other large entrepreneurs, control more than a half of the Russian economy. Therefore, it is obvious that we interfere on political questions" (For more on Russian-Slovak relations, see Duleba, in this volume). This does not mean that a relatively standardised market will not prevail in Russia after some time. However we are sure that the Russian model of transformation, with its emergent plutocracy, clientalism and semi-criminality, will take longer, cause greater hardship and be more uncertain.

A crucial question, therefore, is whether post-communist societies and their elite will attempt to limit the room for plutocracy, corruption and criminality, or whether they will consciously create the space for these forces to benefit from unlimited political power and economic gain. This question is relevant to Slovakia today: will Slovakia continue along the path of the past two years, 1995-1997, intentionally promoting a plutocratic, clientalistic and semi-criminal system? Or will Slovakia return to the development of an economy that offers equal opportunities and respects the rule of law? The most appropriate indicator of Slovak success would be accession into EU. Nevertheless, the problem has to be solved in Slovakia because although EU membership would help prevent the russification of Slovak relationships, Slovakia has to persuade the EU about its eligibility for membership. That means it must respect the EUs political and economic criteria of membership. Slovakia must thus look to its internal resources to prevent russification.

References

Duleba, A.: ,,Slovensko ruské obchodné vz_ahy. Viac otázok ako odpovedí." (Slovak Russian Trade Relations. More Questions Than Answers.) Key speech in the discussion club of M.E.S.A.10 and TREND , January 22 1997.

Javlinskij, G.: ,,The Chain of Calamities", The Financial Times , January 31 1997.

Marcinèin, A.: Slovakia: The Family Circles Privatization.  (Centrum pre hospodársky rozvoj, Bratislava, 1996)

Michal, J..: Komparativní ekonomické systémy  [Comparative Economic Systems] (Universita Karlova, Praha 1994)

Miklos, I.: Corruption Risks in the Privatization Process.  (Windsor Klub, Bratislava 1995)

Miklos, I.: ,,Transformácia hospodárstva SR a fungovanie hospodárskeho systému." [Transformation of Slovak Economy and Operating of Economic System], In: Zmena hospodárskeho systému.  Konrad Adenauer Stiftung, Praha, 1996.

Miklos,I.: ,,Privatizácia." [Privatisation], In: Bútora, M. - Hunèík, P. (eds.): Slovensko 1995. Súhrnná správa o stave spoloènosti , (Nadácia Sándora Máraího, Bratislava 1996)

Miklos, I. and _itòansky, E.: ,,Ekonomika." [Economy], In: Bútora, M. & Hunèík, P. (eds.): Slovensko 1995. Súhrnná správa o stave spoloènosti , (Nadácia Sándora Máraího, Bratislava 1996)

Miklos, I., Ni_òansky , V. and _árska, E.: A New System of Funding Local Government Institutions  (Proposal for a Radical Change). (MESA 10, Bratislava 1996)

Miklos , I.: Systém dôchodkového zabezpeèenia - èasovaná bomba a èo s òou. [System of Pension Security - a Time Bomb and What to Do with It?] Príspevok na Konferencii SPACE v Bratislave 22.11.1996, published in Národna obroda , December 4 1996.

Olson, M.: Záhada ekonomického rastu [The Mystery of Economic Growth] SME , February 28 1997.

Programové vyhlásenie vlády SR, [Programm Announcement of the Government of Slovak Republic]parlamentná tlaè, Bratislava, January 1995.

Rutland, P.: Russia s Energy Empire Under Strain. In:Transition,  Vol.2, No. 9.

Správa misie Medzinárodného menového fondu. [Report of the Mission of International Currency Fund] In: Informácia o správe misie MMF  ..., working documents for Government of the SR, Bratislava, December 1996.

Správa o kontrole trhu s obilím za rok 1995 a prvy stvr_rok 1996, [Report of the Control of Grainmarket in the Year 1995 and in First Quarter of 1996] Parlamentary press, Bratislava, September 1996.

The Index of Economic Freedom, The Heritage Foundation, 1995, 1996, 1997.

Transition. The Newsletter about Reforming Economies. World Bank, 1995 - 1997.

Transition Countries Risk Rating. Euromoney 1996.

The World Bank Country Economic Memorandum Mission (SR government material), Bratislava, 1996.

Monitoring of the monthly Business Central Europe , weeklies Trend , Slovensky Profit , Plus 7 dní  and Domino  and Dailies SME , Národná obroda , Pravda , Slovenská republika , Práca  and Novy èas .

---

Note 1: Act No 451/1991 Zb., established the prerequisites for the right of an individual to execute specified functions in the government bodies and organisations of the ÈSFR, the Czech Republic, and the Slovak Republic. The act explicitly states that Communist Party officials, members, co-operators with the secret state police, and graduates of Moscow police schools are forbidden to work in some state organizations and institutions for a period of 5 years. It affected old structures because it stipulated that former Czechoslovak Communist Party officials could not execute managerial functions in state companies, state joint stock companies, foreign trade companies, state funds and state financial organisations. Back.

Note 2: Dollar conversions are calculated at the exchange rate of 30 Slovak Crowns (SKK) to 1 United States dollar (USD) This was the approxmate exchange rate for most of 1995 and 1996. In 1997, however the crown has depreciated against the dollar by between 10 and 15 percent. Back.

Note 3: Gaulieder is a former coalition MP who was involuntary deprived of his mandate by vote of coalition majority after leaving the HZDS MP Club (for more details, see Szomolányi, in this volume). Back.

Note 4: Loans are classed in to five categories according to how well they are performing. Classified loans are those that fall into categories three through five and bear increasingly less liklihood of being repaid. Back.

Note 5: As of this writing, the Russians have delivered only two of the eight fighters. Back.

Note 6: Editors' note: Since this writing, Parliament elected the author to FNM's Supervisory Board in apparent capitulation to opposition and EU pressure. Back.

Note 7: An independent television station, Markiza, began to operate in fall 1996. It has only recently begun to function as an independent, critical observer of government activities (skolkay, in this volume). Back.

Note 8: Secondary insolvancy occurs when a firm's debtors are in arrears and, as a result, the firm cannot pay its creditors. Primary insolvancy occurs when a firm cannot meet its debt obligations simply because it cannot generate enough cash from its business. Back.

Note 9: The commission will consist of five government appointees and the CEO's of the five largest banks, including the Governor of the National Bank. Back.

Note 10: This can be done through a number of mechanisms. Managers of state firms will often agree to be overcharged for their goods and services and underpaid for their products and assets--particularly when they have an interest in the other firm. State managers will also often hire firms to perform services--such as public relations, etc., that they don't really need (For a more thorough discussion, see the interview with NKU chairman stefan Balejík in Národná Obroda , February 2, 1997). Back.

Note 11: The author of this study recently lectured at a seminar for mayors, where the mayor of a small Eastern-Slovakian town said that HZDS offered to solve his town's acute financial scarcity on the condition that she establish the organisational base for HZDS in that town. The mayor said, that she established it, her husband is a chairman, they have only 13 members and no more financial difficulties. A curiosity in this story is that the town is entirely Hungarian, and its citizens have not voted for HZDS in the past. Back.

Note 12: e.g. fully: VS_ Kosice a.s.; Pova_ské Cementárne a.s.; Ladce; Nafta Gbely a.s.; partially: Duslo sa3/4a a.s. Back.

Note 13: Investièná a Rozvojová Banka a.s.--30 percent, Vseobecná Úverová Banka a.s.--48 percent, Slovenská Pois_ovòa a.s--50.5 percent, and Slovenská Sporitelòa a.s.--91 percent Back.

Note 14: Additonally, in March and September 1996, the journal Euromoney  published its biannual investment risk rating. Of 178 rated countries, the Slovak Republic ranked 49th. By comparison, Slovenia ranked 34th, the Czech Republic 35th, China 40th, and Hungary 44th. Slovakia's ranking is not unsatisfactory but Slovakia's position in the rank order has slipped while the position of most other reforming countries rose. In September 1996, only eight out of 32 countries in transition recorded a fall: Slovakia, Albania, Kazakhstan, Belarus, Uzbekistan, Kyrgyzstan, Turkmenistan, and North Korea (Euromoney , as cited in Transition , 7/1996). Back.

Note 15: The difference between the credit risk ratios (CRR) of Slovak commercial banks and banks with foreign capital is illustrative. As of June 30, 1996, the CRR of domestic commercial banks was a relatively high 0.378 while the CRR of banks with foreign capital was 0.098, and the CRR of foreign affiliated bank branches was 0.173. The great improtance of domestic banks in the Slovak economy is evident also from the total CRR, 0.311. ("The Recovery and Development of the Bank Sector of the SR,"The Finance Ministry of the SR, Bratislava, December 1995). Back.

Note 16: Editors' note: By December 17, 1997--less than year after VSZ and its affiliates achieved a controlling stake, IRB was insolvant and had to be put under the administration of the NBS. Back.

Note 17: Editors note: Since this writing, the FNM has had to borrow abroad to meet its initial bond obligations. Back.

Note 18: In another part of the article Javlinskij emphasizes, "the absence of institutional change during the market transformation leads inevitably to the economics of a semi-criminal kind, hindering industrial development" (Financial Times , January 31, 1997). Back.

Note 19: My views on russification are not uncontroversial within Slovakia.. According to former economic advisor to Meèiar and current State Secretary of the Ministry of Finance, Peter Stanek, the influence flows in the opposite direction, "Russians are interested in the transformation know-how which began to be applied in Slovakia after 1994." According to Mr. Stanek, "Russians are motivated by the fact that the suggestions of Western advisors did not help this country." The influence of the Slovak model, he asserts, extends to the World Bank, which, he asserts, demonstrated an "interest to offer its application to other transforming countries" (Trend , January 15, 1997, page 9A). Back.