Electronic Library of Scientific Literature - © Academic Electronic Press


Volume 51 / No. 4 / 2003




Economic Prerequisities for Slovakia’s  Integration into the European Monetary Union


The process of integrating the Slovak Republic (SR) into European institutions has reached the stage where membership in the European Union (EU) has more or less stopped to be a question mark and the question of future admission of the SR to the European Monetary Union (EMU) has become a priority. At the same time, entry into the EMU upon the accession to the EU is not an option but a must, since for new Member States including Slovakia; the possibility of the so-called opt-out has not been deli-berated. A question remaining is the time scale of the entry into the EMU, which is not explicitly determined, and the country has a certain, although limited freedom to shape it. When addressing this issue, it is necessary to formulate a strategy which would reduce potential additional costs to be incurred when the fulfilment of eligibility criteria for entry into the EMU is artificially speeded up, and which at the same time would reduce the losses to be incurred in the event that the entry is unnecessarily delayed.

In order to outline the context relevant for the development of such a strategy, an Analysis of Economic and Monetary Development in the Slovak Republic from the Point of View of Integration of the Slovak Republic into the European Monetary Union was elaborated by the research staff of the Institute of Monetary and Financial Studies (IMFS) of The National Bank of Slovakia (NBS), in 2002.

This article presents in a shortened version the first part of the above mentioned IMFS’s document. The understanding of the process of convergence is first defined as a phenomenon that has two complementary and interdependent facets, real and nominal, which leads to the necessity of parallel progression along both lines. In order to assess the situation in respect to the accession process in the SR, it is important to compare the status and the dynamics of development of the Slovak economy with the economies of the current EMU members prior to their entry into the euro area, as well as of the present candidate countries. It can be stated that the parameters of the Slovak economy do not differ significantly from the parameters pertaining to the other countries compared. At the same time, there are some specific differences calling for specific solutions. In connection with this, there is a discussion on the issues of fiscal convergence, consequences of changes in the structure of financial market upon the currency transmission, as well as issues related to the nature of potential responses of the Slovak economy within the euro area from the point of view of the optimum currency area theory. Attention is also paid to the issues such as developments in the foreign trade sector and the competitiveness of the Slovak economy. The article closes with a formal framework for accession to the EMU. To be continued.

For more details see the full text (Slovak as well as English version) on the National Bank of Slovakia web page www.nbs.sk.

Development Trends in World Economy and Capital Markets


The integration processes and globalization of the world economy is presently connected also with a new understanding and character of the economy. Economic theory nowadays brings the “new economy” category which – in the 90s of the last century – caused significant changes not only in the structure of the economy but also in its mechanism of functioning.

Qualitative changes are also reflected in economic growth which is closely related to labour productivity growth. The massive growth in investment inflow into the branches of the new economy has induced the changes in the economic cycle as well. The problems as innovation cycles shortening, corporate size, etc., came into the forefront. Besi-des this, the character of old industries is being changed radically, and thus many theorists point out that it is quite difficult today to find the division line between the old and the new economy.

These changes in the economy have influenced also the capital markets, which reflect real economic processes. High growth rates of the high-technology branches led – at US capital market, and later also at the European one – to the formation of a speculative bubble that multi-exceeded economic level of these branches. The bubble collapse has brought not only sizeable losses for investors but also their serious mistrust of a stock market and particularly the negative attitude towards investing into the new economy industries. That attitude led automatically to a significant drop in production and dragged the economy into the new recession.

These negative appearances at the end of the year 2000 expressed themselves also in theoretical approaches that refused the new economy phenomenon. However, in our opinion, previous wave just created the base for the further, even larger development of these industries. It can be expected that this process will be more long-term and accompanied by the changes and development in all branches of the economy.

To what extend do the transition economies – especially V 4 countries: Slovak Republic, Czech Republic, Poland, Hungary – react to the new situation in the world economy? All these countries are trying to become a part of united Europe, that means to integrate their national economies into the compact entity which the European Union leads to.

Mentioned countries, despite some particularities, initialised their economies at almost identical economic base. Building a modern economy in these countries requires a wide range of restructuring processes. These should be shaped so that they will mirror world trends of the development in the most advanced countries and at the same time they will meet needs of the European economic area. The economic structure of the V 4 countries is still oriented mostly at the branches of heavy and manufacturing industry and as our analysis indicates, it doesn’t show any significant changes regarding the share of individual industries on GDP during the 90s. Ignoring the restructuring processes in these countries definitely reveals the lagging behind the developed world.

While the real economy in developed countries is closely connected to a capital market, it is quite difficult to find the connection between a capital market and the economies of the transition countries. Based on the analyses of the particular national capital markets` indexes and on the industrial structure and the share of GDP, we came to a conclusion that indexes’ structure doesn’t reflect the structure of the economy at all, and so the capital market could hardly reflect the economy level. However, it can be evaluated positively, that the structure of indexes already indicates a tendency towards the new industries. The new industries have a notable appearance in the structure of indexes yet, but in the frame of national economies they don’t really show such a significant share of GDP as we would wish them to do. There is also an unbalanced composition of individual stock titles in the structure of indexes, which causes quite chaotic formulation of the capital market level, or indication of its development trend.

Despite lagging behind the USA in the field of new technologies, Europe also acces-ses to a building of the new economy very responsibly. In the year 2000, there was proclaimed the eEurope plan which determines the objectives and gradual steps on how to manage this process. This plan is followed by the action plan eEurope+, the aim of which is to accelerate reforms and modernization of the candidate countries economies that V 4 countries belong to.

In accordance with these intentions, also the Slovak Republic has expressed its initiative in the eSlovakia program related to a building of the information society as the way of improving the economic performance.


Jaroslav HUSÁR

In this article we focus on inflation. The level of inflation in Slovakia could potentially complicate efforts to meet Maastricht criterion. The low GDP per capita requires high economic growth. Therefore the article begins with a discussion of the nature of inflation – a general increase in price level. The theory has agreed upon that changes in both aggregate supply and aggregate demand are the sources of inflation. Looking at the known model of aggregate supply and demand (Fig. 1), one can see how an increase in demand can raise the price level. The rise in the price level is caused by the outward shift of aggregate demand along the rising portion of the aggregate supply schedule. Then we discuss how a rise in the price level can be caused by the contraction in aggregate supply or supply shock. In other words, the worsening of aggregate supply conditions raises the price level with no change in aggregate demand conditions (Fig. 1). Our analysis suggests an important difference between inflation driven by increases in demand and inflation driven by reductions in supply. In the case of aggregate supply shifts, output falls as price rise. In the case of aggregate demand shifts, there is an increase in output as prices rise. In the analysis we stressed that this latter case suggests the existence of an important trade-off. Increases in aggregate demand will induce higher level of output, but at the cost of higher prices. There will be an inflation. By this analysis we have shown the possible problems of the Slovak economy in the field of inflation. The economic policy has not been based on the theory.

Our next analysis concentrates on the wages, prices and productivity. An economic policy in Slovakia has allowed an increase of general price level of goods and services but wages were constant. We tried to develop a relationship in movements of wages, inflation and productivity. Our aim was to deduce the basic wage- price – productivity relationship. We derived it from the version of the labor market equilibrium condition = P.f(N). Using mathematical techniques we have come to an important conclusion. If W grows at the same rate so that , will be 0, that is the equilibrium price level will remain unchanged. This is an important knowledge, rule for wage increases, saying that the wage rate can grow as fast as productivity with no change in equilibrium price level.

Inflation trends in Slovak economy were driven by changes in administered prices for such items as energy, water and rent. These prices were raised significantly in recent years (to bring them closer to market prices). The impact on the economy was never published. In this connection (inflation an its dissemination) the input-output analysis provides perhaps the most complete examination of all the complex interrelations within an economic system. Due to the fact, that input-output analysis traces through all these interindustry relations to provide information about total impact on the prices of all industries of the original increase in price indices or a components of the value added, we showed on example the possible computations of repercussions on the economy in the field of inflation. This helps policy makers to create the economic policy that can help to economic system functioning.

An Historical Analysis and Optimisation of Money Market Portfolio


Questions about profitability of using exchange rates changes at various kinds of financial investments are a subject of a frequent analysis and speculations as well. At present the question is alive mainly in connection with conjectures about possible exchange rate losses at the conversion of dollars returns from the sale of Slovak Gas Industry into Slovak currency. But the goal of the paper is not to analyse this special case. The paper concentrates the attention on historical analysis and optimisation of portfolio of selected international money market tools.

In general, for an international investor, fluctuations in asset prices must be converted from the local currency into the currency in which portfolio performance is evaluated. Exchange rates changes are therefore critical for measuring and comparing the returns from different countries.

In the paper the special money market that consists of three months tools of Slovak (BRIBID3M), Czech (PRIBOR3M), Polish (WIBOR3M), Hungarian (BUBOR3M), Switzerland (SF003M) and British (BP003M) money markets together with a one USD (SBWMUD3U) and EMU (SDWMEU3L) three months tool of money market, is created. The paper looks for an answer to the question what kind of currencies was efficient for investors to hold from historical point of view. Monthly returns for period from September 1996 to May 2002 are used at the analysis. Together with them the data about monthly exchange rates of Slovak currency with corresponding currencies of assumed money market tools were used as well.

Characteristics of the money market tools as average returns and standard deviations of returns are used in the analysis. Returns of assumed money market tools after the conversion into the Slovak currency where the corresponding monthly exchange rates were taken into account are used as well. It is evident that higher returns in SKK go together with higher risk that is measured with standard deviation of returns. We would also like to note that the whole analysis is simplified in this way that transaction costs connected with conversions of returns into Slovak currency are not taken into account.

On the described market of assets the frontier of investment opportunities is construc-ted in such a way to consists of the assets portfolios that ensure required (expected) returns at as low risk as possible. The part of the frontier, from the point that corresponds to the portfolio with global minimum risk, as it is known from a modern portfolio theory, creates the set of efficient portfolios. From the technical point of view one need to solve a series of quadratic programming problems that are known as Markowitz portfolio selection problems. When the short sales are allowed it means that investor can also borrow tools (assets). From the formal point of view it means that the proportion of such an asset in the portfolio is expressed with negative weight or with negative percentage proportion. For an effective realisation of solving process the Excel solver with a special created VBA procedure was used. A frontier of investment opportunity set is approximated also on the assumption that short sales are not allowed.

The resulted structures of optimal (efficient) money market portfolios presented in the paper provide relatively clear answers on the question how exchange rates changes were to be used at investments into money market tools. It should be note that these results follow from historical analysis and do not provide investment recommendations.


New Product Charges Implemented in Waste Management


In recent years, the use of economic instruments has becoming an important issue in EU Member states and in CEE countries. In waste management, product charges, taxes and users charges are the widely implemented instruments. For some products, there is also implemented deposit refund system and take back scheme. Economic instruments attempt to achieve positive environmental effects by employing economic incentives to change behaviour so as to reduce pollution or the consumption of resources.

There are two types of classification of environmental levies: by function and by type of commodity to which levy is applied. Classification by function divides levies into three groups: cost-covering, incentive-creating and revenue-rising. These functions are not exclusive can be integrated into the one instrument.

The aim of the study is to analyse environmental effectiveness and economic efficiency of product charges for individual products, that has been introduced to the Slovak environmental policy by new Waste law and compare them with those already effective in number of European countries. Secondly to address the issue of earmarking and financing waste management programs in the Slovak Republic, with respect to transition process from regulatory to market economy and ambitions of the Slovak republic to became a member of EU.

Main sources of information for this project were Database on Environmentally related taxes in EU member states and similar developed by OECD. Information about economic instruments in CEE countries was from database of the Regional Environ-mental Center as well as national statistics.

Results of the analyses shows, that European countries are most successful in fulfilling cost covering function of proper environmental treatment of waste (52 per cent) as well as revenue-raising function (52 per cent). Less interest is given to the incentive creating function of the economic instruments (31 per cent). Incentive effect is in some cases achieved with diversification between products in the charge or exemption from the levy to products, which fulfils environmental criteria. There are some typical products char-ges, which prefer the revenue-raising function (e. g. oil products, packaging materials) and other with the dominant cost-covering function (e. g. batteries, tyres). The incentive function of economic instruments in waste sector is essential for fulfilling EU priorities in the reduction total amount of waste. In European countries interesting example how incentive function can be achieved is combination of various instruments in packaging (governmental agreements, tax and deposit refund systems).

The most important conclusions for Slovakia are to increase the incentive function of economic instruments in waste management as well as to improve cost covering (presently 8 per cent). These together with revenue rising objective is expected to be achieved by proper functioning of new product charges and public recycling fund that shall organise collective treatment of waste commodities as well as the investment to recycling and reuse technology.

The Possibility of the implementation EVA metHod due to evaluation of claims


The main duty of each creditor is to pay his/her claims on time, because of large amount of company’s money that those claims carry. The value of claims is always connected with the state of the creditor. That is why there is an importance of creditor’s financial analysis first when we want to analyze claims. If a claim is not paid on time it can either decrease or increase its value.

There are included all positive or negative events in a stated value of claim that can influence its market price. To give a claim its value we can use several methods: method of nominal value of a claim including all accessories, cost method with risk evaluation, rating method, value method, liquidity method, a combination of those methods.

To make evaluation of company performance we can use a widespread-used indicator EVA (Economic Value Added). Evaluation of creditor’s company by EVA indicator is a proper way how to find out value of claims. On the other hand, to acquire all necessary data that are needed can be a problem in this kind of evaluation. Indicator EVA represents the basic criteria, which supply us with valuable information about levels of company’s management and serves us as a tool for evaluation of the company. To summarize the effect of EVA we can conclude that EVA quantifies the value that is “added” into the company by company’s operating activities in a given time period. EVA indicator need to be understood as a net yield from operating activities of the company decreased by the costs of the capital input.

In the case of qualification of the claim value by EVA method we need to consider a share of company value that counts into the claim. Moreover, there are many other influences that need to be consider as an existence of other preferred claims, a deposit right connected with the particular claim ..., etc.

There is a need to stress out a selective approach when evaluating claims. Each busi-ness case represents a specific operation from which a claim is developed. An important role also plays economic information about creditor which is necessary for claim eva-luation. A problem is in accessibility of that information which is sometimes very low.

Very important aspect when evaluating claim is a time viewpoint. The time viewpoint represents the reality that claims are recorded in accounting it their nominal value. The majority of claims have character of trade-loan claims and each subscriber pays his/her claim after some time period. The later the claim is paid after its payment period, the lower is its value.

General value of a claim is set up according the valid legislative as a product of an initial value of the claim and a coefficient of ability to enforce the claim. It needs to be understood that initial value means accounting value. Coefficient, as well as the value of the claim, can be stated thanks to EVA indicator.

Knowledge Intensive Business Services in a Transition Economy

Vladimír BALÁŽ

This paper analyses contribution of knowledge-intensive business services (KIBS) to economic growth. It employs Input-Output Tables provided by Slovak Statistical Office for testing several hypotheses on role of KIBS in a transition economy. Development of business services primarily was closely correlated with development of communication services in developed EU-member countries. This assumption did not hold much for Slovakia,. This paper found a weak correlation only, although the explanation power of the model seemed to increase over time. The second assumption was about causal relation between use of communication and business services and output increases. The use of communication and business services was a proxy for introduction of new technologies in production function. Production functions for both the communication and business services indicated that these industries made a significant contribution to economic growth. Output elasticity coefficients were quite similar in Slovakia and the EU-member countries.

Electronic Library of Scientific Literature - © Academic Electronic Press