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Jaroslav NĚMEC – Ivan PRACHÁR
Only in the last two years it was generally acknowledged that the Slovak economy has been found its in imbalance. Descriptions of this imbalance as well as the explanation of causes behind it are far from unanimous. Most often the imbalance has been interpreted as a result of politics of the past government (1996– 1998) during leadership of which the amount of investment has significantly increased (first of all investment prompted by the government) generally at the expense of credit resources. Such development accelerated indebtedness and decreased economic outcome, and caused the deficit of the balance-of-payments and the governmental budget deficit, and at the end it produced devaluation of the Slovak currency with subsequent negative effects. The most devastating involve: halt of the GDP growth, deterioration of the situation in enterprises, and unemployment growth. Authors of this paper accept reservations and critical evaluation of policies carried out by the former government, but at the same time they try to prove that these policies do not represent the beginning of the imbalance, they only made it deeper.
The imbalance appeared right after the liberalisation of foreign trade not only in Slovakia in 1991 (former Czechoslovakia), but also within all planned economies with regulated foreign trade. In all these countries the production potential was larger than the one which could be absorbed by free markets after the regulation of market exchange was removed. While goods produced by this potential was traded via regulated markets and a limited exchange at free markets prevailed, it was used more or less in a full scale and enabled the level of incomes that corresponded with the produced and realised product. Incomes related to the use of this potential created the demand that was met also by goods imported from free markets. Imports however, were, limited by exports capability of a particular country to free markets. Nevertheless, an overall level of incomes dictated the demand for imported goods. On the other hand a limited supply of goods from free markets must resulted in unsatisfied demand for goods from free markets, while domestic markets supply often remained stockpiled. If the governmental intervention was able to keep imports balanced with exports trade imbalance problem would not be critical. Immediately after regulation was canceled, the trade imbalance became visible. At the same level of exports capability to free markets and the existing level of incomes, it was just a matter of time when devaluation of the Slovak Koruna appears, prices of foreign goods would grow and overall demand would decrease.
Czechoslovakia avoided such situation through devaluation. Afterwards prices of foreign inputs and subsequently prices of other goods went up drastically. This led to a decline in the overall demand at the level at which imports evenly balanced exports. A part of aggregated output could not be sold in a situation when demand decreased and a new price level appeared (industrial goods price index in 1991/1989 = 1.77). Comparing to 1989 GPD decreased in 1991 at 83.8 per cent and the decline went on until 1993 when it stopped at 75.01 per cent of 1989. Industrial production declined in 1993 at 67.4, gross agricultural production at 42.7, unemployment rate by 16.2 and retail turnover at 61.2 per cent.
Decreased production led immediately to reduced consumption. However, this was, true only for a part of consumption – that one determined by immediate level of incomes. Consumption had decreased already in 1991 to 76.9 of the level in 1989 and in 1994 to the level of 71.8 per cent. However, consumption of public goods satisfied by schools, hospitals, social, scientific, and similar institutions did not decrease proportionally. These were built gradually along with increase of production potential, and hence they determined the extent of public consumption corresponding the income level prior to 1989. After the resources have dwindled, it became difficult to restrict the consumption while physical goods for meeting consumption needs still existed. It was still possible to use school buildings, hospitals, etc. for a limited period of time without putting new investment in their restoration. The same was true regarding the entire infrastructure – roads, railways, gasoline pipelines, etc.
Reduction of such consumption was complicated by the fact that production potential on which the consumption was based was still there, despite the fact that actual product was insufficient for keeping the consumption at the same level. There was a chance that the economy would be capable to maintain equilibrium of decreased production in a relatively short period of time, and reach the previous level, and hence to reach the initial degree of public consumption. In fact, this was the only alternative: avoiding – by a strict reduction in the consumption – the economic imbalance between creation of sources and the overall consumption. Such attempt was echoed in policies following the emancipation of the country, especially during the period following 1994. This politics, however, did not succeed and was removed in 1998 resulting in a deeper inner imbalance as well as a renewal of foreign trade imbalance.
This paper analyses the development of the imbalance of the Slovak economy during the indicated period, focusing to those areas where the imbalance was mostly visible – resource formation (output, prices, costs, depreciation allowance, capital gains), use of capital and reserves (investment, consumption, domestic and foreign savings), increase of deficit and deficit settlement (trade balance, governmental budget, industrial loss, decrease of profit margin, inter enterprise indebtedness, decapitalisation of enterprises, etc.). The paper explains also barriers that halt the renewal of initial resource formation and override the imbalance this way. A high proportion of capital costs (especially fixed capital costs), brought about by permanent under usage of a part of resources the most significant of these barriers. This has been the main reason behind the deficit payment of general costs since 1991. The later uncovers as the declared deficit among 50 per cent of enterprises and as a slow down or even a halt of fixed capital renewal among a larger portion of them – including negative impact on restructuration and modernisation that are basic conditions for market expansion and export growth. Expansion policies of the previous government did not overcome the barriers in resource formation. By releasing the final consumption and by foreign loans the GDP growth was revitalised. Nevertheless this did not speed up the resource formation at a corresponding level, but only renewed the trade deficit and payment imbalance, increased internal and external indebtedness and caused devaluation of the currency. The problem of imbalance between the formation and the use of sources remains still open. However, this issue becomes more and more pressing because of increasing decapitalisation, and deficit, and at the same time, under the demand to reduce consumption. This problem is one of the most critical for the present government to salve.
Zdeno JAURA
Despite of the fact that the Parliament annually takes decision on big state budget expenditures, the real power of this institution is rather limited.
The article highlighted especially two areas of concern. Firstly, the existence of so called budgetary measures, and secondly, mandatory expenditures and the impact of existing state funds. The experience has shown a big difference between the real state budget spending and the state budget law. The highest absolute value of differences between the approved act of the state budget and the real life spending was recorded in 1996 amounting almost 70 billiard SKK. In other years the differences were also considerable: in 1997 = SKK 43.083 bld, in 1998 = SKK 27.126 bld, 1993 = SKK 18.005 mil. Based on these figures there is a question: what are the reasons of such big differences between the approved budgetary act and the real spending?
There are two possible reasons. The first one is resulting from the state budget act itself that every year includes the paragraph about so called budgetary measures, i. e. measures amending the state budget act when materialized through “official” way, or by a formal way which is supported by the law. The second reason usually appears due to deviations from the state budget act in the real life. As for this difference, there is no support by the law, and in the real life this is indicated as the lack of budgetary discipline that is leading to an excessive spending to compare the approved state budget act. In general, the process of approving the state budget in the Parliament is considered to be very important, as well as the “fight” of particular industries for funds allocation, however the experienced politician and especially professional governmental bodies know that there is enough space for manoveuring and pushing forward particular interests even from the outside the “very visible Parliament”. All this is done under the law support in the shadow of the big policy. In the real life it means that big amounts are decided outside the Parliament. The decision making power of the Parliament is curtailed also due to other reasons. We consider mainly mandatory expenditures and the existence of the state funds. When mandatory (by the law) expenditures are concerned, the Parliament has no alternative, if the law had not been amended. Among other “predefined” state budget expenditures are also found state commitments regarding interest and principal payments. There is no alternative for the Parliament (unless commitments are neglected).
A special attention should be paid to the existence of the state funds. So far, there was a basic tendency of gradual increase of the importance of the state funds and a relative importance of the state budget. In 1993 the share of the state funds on the total state budget expenditures represented only 1.9 %, then in 1998 it was assumed to reach up to 14.5 %. In the next years this figure has been increasing considerably every year.
The large share of the state funds on the state budget raised a question on the funds economy in general and also on its efficiency. The state funds economy should be evaluated upon broad concept of the economic policy. However, one principle is true and it says the foundation and functioning of the state funds have a strong feedback to the state budget. This at the same time removes the chances to take relatively operational step in reaction to the changed situation.
When all the problems are taken into account (budgetary measures, mandatory expenditures, interest and principal payments, and the existence of the state funds), we have to conclude that in fact, the Parliament when approving the state budget act, can take only partially decisions about the future state budget expenditures.
The budgetary discipline is the most important prerequisite for not creating the imbalance in the public finance. So far, however, no big success has been achieved. Therefore it is very important to analyze what is understood under the notion “budgetary discipline” when attempting to decrease budgetary measures. Re-evaluation of the economic principles and of the state funds regarding the public finance is strongly recomended.
Ľubica AZUDOVÁ
The study deals with the social-economic situation of households in Slovakia. It is a significant indicator of success of the economic policy as well as the outcome of the transformation of the society. The transformation of the social-economic system in Slovakia led towards principal changes in the life of households.
The growth of living expenses, the problems of unemployment and poverty, the growth of social disparities and significant differentiation of incomes concerned all of the groups of inhabitants and led towards changes in the strategies of households regulation to new economic conditions.
The study considers the situation outlined not only from the strict economic point of view. The problem is presented also within its wide social dimension since the perception of reality by the citizens is not formed by abstract information about macroeconomics parameters. It is formed d by the real state of their microeconomics situation which is developing in contradiction to their expectations these days.
The unemployment, the growth of living expenses and the decrease of pecuniary income are the problems which are considered by Slovak households as dominant and which are bringing unsatisfaction at present times.
Despite the statistic values of GDP and the traces of economic quickening in 1994 to 1998, there was no decrease of unemployment that was expected. This of course was reflected on the quality of life of a growing number of the affected households. The study therefore refers to a prevalence of the supply over the demand on the labour market, both from the macroeconomics and microeconomics point of view. This prevalence was manifested in macro level by changes in employment in sectors and branches of the national economy of the Slovak Republic and by disparities on the regional labour markets. In micro level it was displayed by number of individual changes in employee status of economically active individuals, or in their being pushed out of the official labour market.
The number of marginal territories with growing social problems, decreases pecuniary income and living expenses increases due to unemployment. Large groups of inhabitants are thus found at social periphery increasing the pressure on the social security resources of income. The excessive overstressing of the responsibility of households for their fate is therefore rather too one-sided and the reality shown that it is fully realised only by a part of households. Significant group of households is thrown upon the net of the social welfare. This fact thus excludes the weakening of the state functions in the social sphere.
The study, moreover displays, in analytical and evaluating way, that the satisfaction of households with their living standard is very strongly influenced by the family income. When the financial situation gets worse, it automatically alters the evaluation of the living situation by the affected household in a negative way. On the other hand, with the increase of income, the satisfaction with living situation grows. The level of financial income determines the activities and possibilities of day to day life, accumulation of the property, consumption and the status of households in wider social structures.
The dominating differentiation of wages and the classification of families or households into social structure of society have influenced the development and the sources of total income. Profound analysis of the income shown significant differentiation of income not only between social groups of households, but also inside these groups. This differentiation is caused not solely by the composition and by “the age” of a household, but also and mainly by the status of its provider in the social structure of the society. Unpleasant financial situation by which the net monthly income per member of a household does not reach the standard of the society as a whole, not even the standard of their social group concerns of 50,2 % of employees households, 62,8 % of workmen’ households and 64 % of farmers’ households. This especially applies to households with more children.
Despite the fact that part of the households of retired persons got close to the standard income per person, this social group may be considered as socially endangered. This is due to the limited possibility of these households to gain additional income as well as due to the fact that significant number of these households obtains only the minimum income per member.
The differentiation in incomes has been manifested positively mainly by the households of entrepreneurs.
The period of transformation brought not only the differentiation in incomes of household groups, but also the changes of the income sources. The ratio of income earned by employment on the net monetary income lowered. On the other hand, the ratio of social security sources income grew together with the income gained from other sources than employment.
In different types of social groups of households, the ratio of income from different sources depends on the main source – employment. The households with the highest income had the highest ratio of monetary income from employment. On the contrary, the households with the lowest income had the highest ratio of income from social security sources. The ratio of social security income on the net monetary income (disregarding the social group) plays a significant role in non-complete families and in families with children (especially with more children) as well as in the groups with the lowest income and households of retired persons.
The growth of unemployment will bring another changes in the income of the Slovak households. The redistribution of income from different sources will go on and worsen the employment income and the pressure on the social security sources of income will grow. The informal economy income sources which are yet marginal will become more significant. New legal sources of income may be expected, too. Unfortunately, the society is threatened by the danger of the growth of black economy income that is connected with serious social-pathologic phenomena.
Eva MUCHOVÁ – Judita TÁNCOŠOVÁ
The Nobel Prize for economics 1999 was awarded to Robert A. Mundell, who is the professor at the Columbia University in New York, for his analysis of the monetary and fiscal policy in different foreign currency regimes and for his optimal monetary region analysis. Even if his scientific works were born more than 30 years ago they have remained up-to-date and have formed the integrated part of modern international economic science. This article is dealing with the most important contributions of Robert A. Mundell towards the economic science development.
During the Bretton-Wood monetary system period and under the condition of a limited mobility of capital, Mundell analyzed the monetary and fiscal policy in the condition of various foreign currency rates regimes. In his pioneer study he developed so called mode of IS-LM for a closed economy and amended it by the international trade and capital mobility. On the basis of his analysis Mundell derived the following conclusions: the fiscal policy is highly efficient in the environment with fixed rates and with a perfect capital mobility since the fiscal expansion increases interest rates, thus forcing a central bank to increase money supply in order to support a stable exchange rates and in this way to improve the effect of the fiscal expansion. In comparison with this, the monetary policy under described environment was found inefficient. With the fixed exchange rates the central bank cannot provide an independent monetary policy. Within the system of floating exchange rates, according to Mundell, the monetary policy is highly efficient because the monetary expansion leads to devaluation of the local currency and increases exports and incomes. In contrary, the fiscal policy in the focus of incomes proved to be inefficient. The fiscal expansion brings about devaluation of the currency and pushes away the net exports.
The original Mundell-Fleming’ s model has certain shortcomings, for example it is a considerable simplification regarding expectations of economic subjects about the exchange rates development and the assumption of the short-term lack of flexibility in prices. Such weak points were improved by other scientists, who incorporated their rational assumptions and price flexibility in their analysis, but it did not essentially change the analysis results.
Robert A. Mundell in his essay from 1961 was the first scientist who opened the issue of the optimal monetary region and raised a question: what are the best conditions for the introduction of a single currency for a group of countries? His work was published in the period when polemics about advantages or disadvantages of a fixed or floating exchange rate were mostly discussed at the academic platform, the existence of a national currency was regarded as inevitable and there was hardly someone who would think a country can give up its national currency and leave its monetary sovereignty. R. Mundell described the monetary region as a region where exchange rates are stable following strict rules. As far as the monetary region is concerned, the optimal solution was described as the ability to keep the reasonable and stable employment rate and price level in the country. The optimal monetary region was specified as a set of regions which are inter-related by a high mobility of factors (mainly labour) with the aim to ensure a full employment if one of the areas is facing an asymmetric shock. According to Mundell the single currency implies a single central bank with the issuance rights. As for the monetary field consisting of several currencies the money supply should be based on the central bank coordination, since no central bank cannot expand its assets faster than the other central banks and avoid a negative impact on foreign currency reserves or the convertibility of currencies.
Mundell analysed this problem on a simple model consisting of two units (regions or countries) which suffered an asymmetric demand shock. If the mobility of factors is functional among regions (countries), but the mobility of production factors is rather low, Mundell recommended that such a region should keep their local currencies operating within the system of floating exchange rates with other currencies. In case when production factors – labour and capital are non-sufficiently mobile within the country, we cannot assume that the flexible national currency, regarding other currencies, would maintain its stabilizing function – this would bring different unemployment rate and inflation for particular regions (countries). In case where the production factors are mobile also behind its national borders, the floating exchange rate system is not inevitable and Mundell supported the system with fixed exchange rates.
Mundell was aware of the fact that in the real world the currency reflects the national sovereignty, and therefore a new monetary arrangement should go hand in hand with political changes. An optimal monetary region would be efficient only in the areas where also a political integration has started. Mundell considered the single currency to be decisive for the monetary union and indicated 3 platforms: the introduction of fixed exchange rate with a trustworthy mechanism of balancing the deficits of the balance of payments, the specification of general monetary policy rules, and finally, the replacement of the local currency by a single currency of the monetary union (or of the third country). In his later works Mundell again returned to the “cost-benefit” analysis of the monetary union he had outlined in his theory on optimal monetary area attempting to define “for and against” of joining the monetary union.
Mundell did not consider Maastricht project to be the only way towards the monetary union. According to him also the countries which remained outside the EMU can take “benefits” from the monetary union even without losing their monetary sovereignty under the assumption they will be disciplined in their budgetary management and their currency will be fixed to euro with a narrow spread. Mundell found important to emphasise two weak points of euro to compare its previous successful predecessors of the single currencies. Firstly, euro was artificially created as a currency without any relationship to gold. Secondly, euro was not a product of a strong central state. Mundell’ s theory of optimal monetary area has become a target of various opposing discussions on formation the monetary union, especially if economic benefits or drawbacks on the monetary union are concerned.