Macroeconomic Illusion and Microeconomic Facts - the Slovak Case

Undue emphasis on short-term macroeconomic goals in transition countries impedes structural change, often resulting in a deterioration of achieved macroeconomic outcomes. Repeated attempts at stabilization are then required and structural reforms become more urgent, and more costly. Many of those who benefit from partial reforms often oppose the full completion of reforms. Social costs are thus raised as governments have to finance explicit and implicit state guarantees while budget income shrinks.Slovakia serves as very good example of how partial reform yields short-term benefits yet long-term costs. The authors here (i) describe the Slovak macroeconomic success of 1994-1995 and analyze the microeconomic forces behind its temporality, (ii) analyze the consequent loss of economic equilibrium, and (iii) discuss current issues facing Slovak economic recovery.The main conclusion reached by the authors is that when macroeconomic instability is entrenched, a strict adherence to macroeconomic policy tools is not enough to remedy the situation and is costly in the intermediate perspective. The solution is to be found, rather, in complete legal and institutional reform, which is a necessary prerequisite to the restructuring of enterprises.