Slovakia Showcases the Benefits of the European Union

Slovakia is one example of the European Union using carrots and sticks to nudge eastern European countries toward the community of affluent democracies.

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A worker checks one of the Kia Cee'd frames manufactured at the newly built Kia car factory near the northern Slovakian city of Zilina on Thursday, Dec. 7, 2006. The production of the factory, that costed about one billion euros (US$1.32 billion) and that is one of the biggest investments in Slovakia, was oficcially launched today on Dec. 7th.

Peter Passell is a senior fellow at the Milken Institute, the editor of the Milken Institute Review, and a consultant to the Legatum Institute's Prosperity Index project.

Pop quiz: Which Eastern European economy has made the most progress since it slipped the embrace of the Russian bear? You could make a case for the Czech Republic (highest per capita income in the region) or Poland (in terms of macro stability and good governance) or maybe even tiny Estonia, which has been doggedly dedicated to free markets. But I'll opt for Slovakia, an underdog that many analysts were once inclined to consign to the same category as Soviet-shattered Ukraine and Belarus.

As a part of Czechoslovakia, Slovakia long played the poor relation to the Czech half. Slovak living standards were perhaps one quarter below that of the Czechs on the eve of the Velvet Revolution. What's more, the Slovak economy suffered greater dislocation in the transition because it was more dependent on industries whose only customers had been other members of the Soviet bloc. Adding to Slovak misery, the newly democratic federation's central government in Prague largely cut off the subsidies that had been propping up social services.

[See a collection of political cartoons on the European debt crisis.]

So, in 1992, when the Slovaks elected Valdimir Mečiar, a rabble-rousing nationalist, and the Czechs gave the nod to Vaclav Klaus, a tough-minded free-market conservative, the two governments quickly negotiated a no-fault divorce. A year later, shorn of Czech subsidies for good and stuck with Mečiar, who was disliked and distrusted by lenders and aid donors in the west, the Slovak Republic's prospects seemed grim.

But the prognosticators have been proved very wrong. Mečiar bounced in and out of rag-tag coalition governments for a decade, pushing his version of crony capitalism while presiding over the corrupt privatization of state industry. Yet, under pressure from democratic forces both at home and in the European Union, he was never able to return Slovakia to authoritarian government. Meanwhile, foreign investors discovered the joys of the republic's low-cost, productive industrial workforce. Volkswagen, Peugeot, and Kia all make cars there, while Samsung, Sony, and Hydro Aluminum (a Norwegian conglomerate) also have plants—not bad for a country of five million. And a series of government administrations maintained both relatively business-friendly practices and price and budget stability in order to advance their goal of integration with the European Union.

[Read the U.S. News Debate: Who Is Handling Its Debt Crisis Better: United States or Europe?]

By no coincidence, the economy blossomed. Average income in terms of purchasing power have quadrupled (to about $24,000) since it bottomed out in 1992—which means Slovakia can boast of the fastest sustained growth in Europe. The Slovak Republic, a member of the EU since 2004, was able to join the eurozone in 2009, converting its own currency at a realistic exchange rate that cemented the competitiveness of Slovak industry.

In the latest Legatum Institute Prosperity Index rankings (which combine economic, social, and political success), Slovakia ranked 36th in the world, behind Poland, Slovenia, and the Czech Republic, but far ahead of most other post-communist transition economies around the world. Indeed, in one key category, education, Slovakia ranked 26th globally, ahead of a host of advanced economies including the United Kingdom, Switzerland, Italy, and Singapore!

[See a collection of political cartoons on the economy.]

Slovakia is hardly a paradise. Corruption remains an issue (the country ranked just 62nd by Transparency International's latest calculation), while rigid labor markets lock in chronic double-digit unemployment. The economy, which is heavily dependent on exports to western Europe, took a bruising in the recession and isn't likely to shift back to high gear until the eurozone crisis is resolved. Hardly anyone would have guessed, though, how far Slovakia would come and how fast.

Yes, Europe is mostly a mess these days with the euro's future in doubt, Berlusconi threatening to make Italy his plaything once again, and some British politicians campaigning to leave the European Union. But isn't it nice to remember what the EU has done well in the past few decades, using carrots and sticks to nudge eastern European countries toward the community of affluent democracies.

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