PRIVATIZATION IN NACC COUNTRIES Defence Industry Experiences and Policies and Related Experiences in Other Fields COLLOQUIUM 1994 ********* COLLOQUE 1994 PRIVATISATION DANS LES PAYS DU CCNA Experiences et politiques des industries de defense et experiences comparables dans d'autres secteurs Colloquium 29-30 June, 1 July 1994 Brussels --------------------------------------------------------- SLOVAK DEFENCE INDUSTRY CONVERSION: A KEY TO ECONOMIC AND SOCIAL TRANSFORMATION Igor Kosir After the Velvet Revolution came the peaceful creation of the Czech and Slovak Republics as separate states. Having inherited 60 percent of the military production of the former Czechoslovakia, the Slovak Republic's biggest challenge is to manage the transition of this sector as effectively as possible, says Igor Kosir. Today, progress is slow and much outside investment is needed, but this republic's privatization efforts are encouraged by a Number One priority: full integration into the European Union as a final strategic goal. Igor Kosir is the Director for the Centre for Strategic Studies at the Slovak Republic in Bratislava. In spite of the serious and complex transformation problems of Central and Eastern European Countries the transition period is a real challenge for their nations, for the whole of Europe and its future integration, for our civilization and its peaceful and continuous development. The new economic growth in several developed countries and anticipated further period of longer economic growth in a big group of economies will play a very positive role in accelerating transformation of the economy and society in this part of our continent. 1994 is only the second year of the relatively short era of Slovak independence, but Slovakia is already ranked among the democratic European nations. Despite a lot of very negative forecasts about our future after independence day and thanks to our more critical attitude toward all events and positive development problems, Slovakia has achieved a quite good position among the European economies in transition. As an independent state, the Slovak Republic has a legitimate right to formulate its own transformation and development strategy and to realize it in cooperation with its neighbours - the more developed European nations and other democratic states. The Slovakian parliament and all main non-parliament political parties and movements support its European orientation as the Number One strategic priority. The symbol of this strategic orientation of the Slovak policy and economy is the Slovakian membership in the Council of Europe, participation in the NACC and WEU activities, associate membership and cooperation with the European Union - with full membership as a final strategic goal. This goal is connected with a very important reorientation of our country's foreign trade and active international cooperation. The peaceful, very cultural and democratic division of the former Czecho-Slovakian federation approved by both chambers of the former federal parliament is without precedent in European history. This political and social event with a very strong economic context was not a real danger for stability of our continent. Slovakia and the Czech Republic are leaders of the transformation process in Central and Eastern Europe. For Slovakia, the real economic growth of 4,1% in the first quarter of the 1994 is a very positive sign. Slovakia wants to use all positive aspects of this heritage, built on more than 74 years of coexistence with the Czech nation. Now, under its own responsibility and national identity, Slovakia is an equal partner in the family of democratic nations. Transformation of the Economy and Society of Slovakia and the Conversion Process ----------------------------------------------------- The conversion process is connected with global changes and restructuring in the world economy after the end of the cold war period. It is a big challenge for our civilization. In the Central and Eastern European countries, this process is more complex. It represents a very important and complicated part of the topical transformation toward the democratization of society and a market-driven economic system. In spite of a very optimistic picture of transformation in 1990-1991, the reality is that natural transformation was slow because the huge systematic social change in the former socialist countries was a real-life case, not a laboratory scenario. The pillars of this process are: liberalization of prices and foreign trade activities, implementation of internal convertibility of national currency, and economic restructuring connected with privatization. This represents a historical ownership change in this area of Europe and requires maintenance of social peace as an important condition for the success of the entire transformation process and economic reform. Achieving economic and social reform is more complicated because of serious conversion and environmental problems of several countries, including Slovakia. The Slovak economy faces this problem more than the average of the Central and Eastern European Countries (CEECs) because of its specific economic evolution after World War II. Slovaks wanted a new federal structure (former Czecho-Slovakia) but it was impossible after 1948 because a very centralized state system was the main feature of the Communist Party regime. But a huge country-wide industrialization process was realized in the 1950s and 1960s which aimed to strike a balance between the two parts of the country. The first Czecho-Slovakian Republic (1918-1938/39) was economically very unbalanced. The Czech country brought to the new European state an important heritage from monarchy, the feature of the most industrialized country of this side of the world. Slovakia was a classical agrarian country without any important industry. The well-known economic crisis of 1929-1933 represented a real national catastrophe, sparking a huge emigration to the western part of this continent and, especially, to the USA and Canada. In comparison with that period the postwar industrialization process was a positive step. But the centrally-planned economy made a lot of mistakes. It reached a very unbalanced production structure for many internal and external reasons. Former Czecho-Slovakia was one of the most industrialized socialist countries and naturally it became a strong center of defense industry, not only for national security reasons but also as a supplier to the entire Warsaw Pact. Slovakia played a very specific role in this economy. In general, Slovakia was not specialized in final industrial production. This advantage was enjoyed by the of the Czech part of country. But Slovakia became an important center of armaments production for the Warsaw pact countries for its geographic strategic location. In addition, this system centralized all activities of decision making, production planning and a huge concentration of foreign trade activities in the country capital. The Slovak part of the Czecho-Slovakian economy was the functional appendix to the traditionally more developed Czech one. The Prague spring movement of 1968 brought a better situation. Czechs and Slovaks agreed the federalization of the country, the creation of two national republics, but a "normalization" process after April 1969 recreated a very centralized state regime. The Velvet Revolution of November 1989 created a new space, and the new democracy enabled us to realize these old aims. Confederation of two equal partners was not accepted by Prague' political structures after elections of June 1992 because of the advantage of the transformation progress enjoyed by the independent Czech Republic. The result of the political discussions between the main election winners was an agreement about the coordinated division of Czecho-Slovakian federation. And this agreement was realized by both sides very seriously. For the new Czech Republic it brought the progress of transformation and for Slovakia, realization of national identity for Slovaks and a new space for state and national development in a European context. A short disintegration process was immediately replaced by the integration of both our independent republics. The first year of independence, 1993, was relatively complicated for continued international relations in terms of the future Slovak orientation and the destiny of economic reform which began in 1991. But all Slovak governments were stressing its strategic orientation on the European integration process. Slovakia is not interested in a new split of our continent. There was some mistrust concerning the conversion process in Slovakia, but a real decline of the Slovak defense industry production from 100% in 1988 (historical maximum of production volume of CSK 19,3 billion - Czecho-Slovak crowns) - 24% of the total production of the Slovak machinery and electrical engineering) to only 9-10% of that volume in 1992 was a convincing symbol of a very dynamic continuation of country conversion process.1 There was a vast discussion about the speed of abolition of the Slovak defence industry production. This was mainly due to a different industrial structure between the two republics, which caused a more negative impact on the labour market - as an absolutely new social and economic phenomenon in Slovakia after more than 40 years. Unemployment became a very sensitive aspect of the whole transformation process. Connected with important loss of the former stable CMEA markets, with decisive concentration of foreign investors in Prague and other Czech firms, with a crucial state of under-capitalization of the economy and relatively high debt among the Slovak state-owned enterprises and increasing inflation - the conversion problem caused a feeling that Slovakia required its own economic policy which focused on its national interest. In spite of a very complex internal and external situation concerning the division of Czecho-Slovakia (unexpected a few years ago in the international community) the peaceful divorce, which was achieved in a very cultural way, influenced the attitude of the international community to the new European states. The basic approach of the Slovak government to conversion was and is positive. Decreasing of expenditures to the defence sector releases a huge amount of resources, creating the possibility to solve other important social and economic problems. But at the same time it evokes a need to restructure - to convert the military-industrial complex. The conversion process is not just an ownership change. It must be considered as a complex restructuring of production on the basis of the civil economy (non-military), its modernization, increasing of its competitiveness and export orientation. It is valid not only for economically small and medium countries. And a huge ownership change in terms of private sector orientation is an important tool concerning the final aim to reach a new quality, a new efficiency of production. There are a lot of serious problems with the conversion process in the Central and Eastern European countries in transition. In addition to the above-mentioned factors which complicate this process in every country, there is another very important influencing factor: conversion requires a lot of money. The undercapitalization stage of all transforming economies connects this process with foreign financial resources. But in the global recession stage there was not a big motivation to invest into converting defence industries of the CEECs. Some CSK 152,9 million of foreign capital participated in the Slovakian conversion projects in the 1991-1992 period. But this represented only 3,1% of conversion cost.2 From the viewpoint of market forces, it is not advantageous for the CEECs that this process is now occurring in all countries at the same time. The total cost is too high. Basic Data about Conversion in Slovakia --------------------------------------- 1. The defence industry in Slovakia represented approximately 60% of the Czecho-Slovakian defence industry production. 2. The former Czecho-Slovakian army ranked among the best armies of the world because of training and equipment (armament). The Czecho-Slovakian defence industry delivered 60% of the latter. 3. The defence industry played an important role in foreign trade activities of the federation (volume of exports to the Warsaw Pact countries was two times higher than domestic deliveries). Armament export was an important resource of foreign currency. One fourth of the export oriented to the Warsaw pact area was realized in the developing countries. 4. The Slovak export volume of CSK 84 billion in the period of 1976-1988 represented 58% of the total defence industry volume of production. 5. Defence industry in Slovakia represented 24 percent of production share of machinery and electrical engineering. 6. Slovakia reached its top of armament production in 1988 - CSK 19,3 billion.3 There were some indicators of the future conversion process in the eighties. But it was not prepared seriously by the centrally planned system from many objective and subjective reasons before 1989. One result of several decisions of the federal government of Czecho-Slovakia (No. 84/1989, No. 103/1989 and No. 42/1990) was the Slovak defence industry decline to a 1992 volume of production of 1,8 billion CSK.4 It was connected with an important dismissal of labour force (30 000). (x) Slovakia is very interested in foreign participation in its conversion projects. In the 1991-1993 period, foreign capital participated in 11 projects from 100 total.5 Without an abolition of debt of defence oriented enterprises (4,087 billion Slovak crown - Sk) in 1993 a majority of these firms was going to collapse because the speed of abolition of this kind of industry was too dynamic, and because of a loss of 70-80 percent of former markets. The government decision was a step to assist the Slovak armament firms to may to restructure their production into civilian one. But it is a longer process than was expected. And Slovakia believes that one of the most efficient ways will be a substantial and very useful cooperation with NATO countries participating in the NACC activities and on the joint activities with WEU. That is why a privatization process in this kind of industry may have some specific features. The role of the state is important, especially in the small and medium countries (for example in Switzerland). The share of the private sector in Slovakia is different: in the first quarter of 1994 its participation on the GDP creation was 40 percent (39% in 1993) including the cooperative private sector. The participation in industrial production in the first quarter of the 1994 was 25,5% (1993: 22,1%), in construction it reached 59,3% share (1993: 49,6%), in transport 51,7% (1993: 49,8%), in retail trade 85,7% (1993: 85,1%), in services 66,8% (1993: 66,7%) and in agriculture (without cooperatives) 25,8%.6 National and International Context of Existing Defence Industry in Slovakia ------------------------------------------------------ The necessity of existence of the Slovak defence industry and its cooperation with NACC partners results from the following circumstances: 1. A strategic priority of Slovakia is full membership in the economic and political structures of integrated Europe. 2. The new Army of the Slovak Republic should be supplied with essential equipment needed to defend and secure the country. 3. The top level of this kind of industry stimulates a real development of the civilian industrial sector, too. 4. The conversion process needs time and a lot of money and this kind of industry may secure some additional resources itself in cooperation with some NATO countries on a bilateral basis. 5. Privatisation of the defence industry is a very important issue. It will be achieved with the entire transformation process, the concrete social climate (the unemployment rate in April 1994 reached 14,17 percent but in some districts more than 25%), and with state and foreign participation.7 The conversion process continues but in a more realistic way, in a climate of confidence and useful cooperation among the NACC and WEU partners. Resources: 1. KOVACIK, J.: Ku konverzii zbrojarskeho priemyslu v Slovenskej republike. Materi‡l Ministerstva obrany SR. 1994. (x) - p. 52, (XX) - p. 54, (xxx) - p. 47 and 51. 2. Statisticka spr‡va o zakladych vyvojovych tendenci‡ch v n‡rodnom hospod‡rstve SR v 1. stvrtroku 1994 a ich predikcii na rok 1994. Bratislava, jun 1994. (xxxx) - p. 20. 3. Statisticka vysledky o nezamesnanosti v Slovenskej republike za april 1994. Spr‡va sluzieb zamestnanosti Bratislava. Bratislava, maj 1994. (xxxxx) - p. 1. 4. GREENBERG, M.E. - HEINTZ, S.B.: Odstranovanie barier. Strategia pomoci dlhodobo nezamestnanym. IEWS, European Studies Center, Prague 1994. 5. Navrh obrannej doktriny Slovenskej republiky. Material Ministerstva obrany SR. Bratislava 1994. 6. Projekt priblizenia SR k NATO. Material Ministerstva zahranicnych veci SR. Bratislava 1993. 7. Partnerstvo za mier. Prezentacny dokument Slovenskej republiky. Bratislava, maj 1994. -------------------------------------------------------- Copyright 1994 NATO All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from the copyright holders. Authorization may be requested for redistribution of the text on a non commercial base by research and educational services. Requests should be addressed to the Economics Directorate, NATO, via e-mail 'scheurweghs@hq.nato.int'. First edition 1994 ISBN 92-845-0079-6 This is the latest in a series bringing together papers presented at the NATO colloquia organised by the NATO Economics Directorate and Office of Information and Press on economic issues in the former USSR and Central and East European countries. For further information please write to the Director, Office of Information and Press, 1110 Brussels, Belgium. The articles contained in this volume represent the views of the authors and do not necessarily reflect the official opinion or policy of member governments or NATO.