Getting Up to Speed; Once a backward target of Western ridicule, Slovakia is now widely seen as Europe's fastest reformer.

Byline: William Underhill (With Katka Krosnar in Prague)

For a politician, Ivan Miklos exhibits a rare honesty. "This may be the most unpopular government in our country's short history," says Slovakia's Finance minister and a principal architect of one of the world's toughest reform programs. Though it's applauded by economists, polls show a bare 2.5 percent of Slovaks are satisfied with their circumstances. Still, Miklos is not about to apologize for the shock therapy he has imposed on one of Europe's most backward economies. "People don't like it--but they respect and accept the necessity."

Miklos is a leading member of the center-right government that, in just two years, has transformed an economy shunned by foreign investors into a money magnet touted by its admirers as a global model. Forget its larger and richer rival, the Czech Republic, and other reform-minded neighbors. The World Bank now rates Slovakia the world's top performer for improving its investment climate. "What Slovakia shows is how much can be achieved and how fast," says World Bank economist Simeon Djankov, the report's coauthor.

The enthusiasm of neoliberals is easily understood. In effect, the reforms strip the state of the outsize role it enjoyed under communism, pushing free-market principles even further than in many of Slovakia's new EU cousins. "In some respects the Slovaks are more advanced than the French," says Nicolas Doisy, an expert on Slovakia at the European Bank for Reconstruction and Development. Paul Hoffheinz of the Lisbon Council, a pressure group that campaigns for a more competitive Europe, says that "countries across Europe preach innovation; very few practice it. In Slovakia, there has been a real revolution among the elite. This is exactly the sort of thinking that's needed in France and Germany, which have really serious problems."

Admirers draw a comparison with Ireland, the "Celtic tiger" of the 1990s, which used EU membership as a spur to modernization. The Slovaks have tackled sacred cows like pensions and health care that richer European nations have only talked about reforming. On the scorecard: the introduction of charges--albeit small--for health care; pension reform, forcing citizens to take greater responsibility for their own retirement; far tougher rules on welfare payments; deregulation of prices, and a simplified tax system with a single flat rate of 19 percent for both corporations and citizens. By 2009--ahead of its Czech and Hungarian neighbors--the government reckons it will be ready to join the Eurozone, the clearest possible sign of fiscal respectability.

That's some turnaround. In the five years after its 1993 split from the Czech Republic, Slovakia became a byword for economic mismanagement. As its neighbors in the old Eastern bloc set about rediscovering free enterprise, Slovakia stagnated under the rule of populist strongman Vladimir Meciar. Madeleine Albright, then the U.S. secretary of State, called the country "a black hole in the heart of Europe." The change began in 1998 with the election of a reform-minded coalition, led by Prime Minister Mikulas Dzurinda, which won a second term fours years later. NATO and EU membership followed as a reward this year.

Foreign investment is slated to double in 2004 to 2 billion euros. Leading the pack are some big-name auto manufacturers, delighted to find a base close to their major markets where there's no tax on dividends and wages are less than 20 percent of the German average. Many of the Volkswagens on Europe's roads now roll out of the company's plant in Bratislava. Both France's PSA Peugeot Citroen and ...