Following major economic reforms, the Slovak economy has grown strongly in recent years, driven by rapid productivity growth, but still has far to go to catch up to the per capita income levels in the advanced European countries. The incoming government has made achieving a more equal distribution of income a priority insofar as this can be done without damaging long-term growth prospects. There is considerable scope both to strengthen growth prospects and to reduce income inequality by raising employment rates, improving education outcomes (including by reducing the impact of socio-economic background), and by removing barriers to product-market competition. The new government has also reiterated its commitment to Slovakias entry into the euro area in January 2009 and has taken steps to make it probable that Slovakia will satisfy the Maastricht criteria for entry on a sustainable basis. Policies may need to be adapted to support macroeconomic stability in the currency union.
Sustaining macroeconomic stability in a currency union
The decline in real interest rates associated with the elimination of the currency risk premium and adaptation to a rise in steady-state inflation associated with Balassa-Samuelson effects in a currency union could trigger a boom-bust cycle. Fortunately, planned fiscal consolidation through to 2010 will act as a counterweight but more vigorous counter-cyclical fiscal policy may be needed. It will also be important to avoid backtracking on earlier labour-market reforms and to implement policies that support labour- and product market flexibility as this facilitates adjustment to idiosyncratic shocks in the currency union.
Increase employment rates
The government needs to lower barriers to the employment of lowskilled workers, including through the possible introduction of an in-work benefit. These measures would also help lower poverty. Measures are necessary to better activate the long-term unemployed and to improve the mobility of workers. In view of significant population ageing setting in from 2030 onwards, hurdles to labour supply of women and older workers need to be removed.
Improving education outcomes
To improve education achievement, which is below the OECD average, and reduce the large impact of socio-economic background on performance, the government should expand participation in pre-school education, reduce stratification in the system, and improve teaching quality. Vocational secondary school education needs to be made more pertinent to labourmarket requirements to reduce high unemployment amongst graduates of these schools. And tertiary education should be made more attractive to technical secondary school graduates to increase tertiary attainment.
Remove barriers to product market competition
Sector-specific barriers to competition are still significant in the network industries and the liberal professions, requiring policy initiatives in both areas. There is significant scope to lower the cost of administrative regulation on enterprises. The benefits of competitive product markets on productivity and consumer welfare could be raised further by public sector reform, notably by improving contract enforcement through further reform of the judicial system and in public procurement.
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