Country Study, Slovenia: Winning the Transitional Economies Race
Country Study
Slovenia:
Winning the Transitional Economies Race
Submitted by
Michael Milton Peter mpeter@indiana.edu
Robert Scott Taylor staylor@indiana.edu
Dmitri Maslitchenko dmitri@mailroom.com
Government Finance in Transition Economies
Professor John Mikesell
Fall 1996
The
World Development Report: From Plan to Market (WDR) argues
that
with consistent and sustained reforms, transition countries can
achieve
successful long-term economic growth, but also warns that
many
challenges and risks -- among them long-term stagnation and
rising
poverty -- still lie ahead for some countries.
-World
Bank News, June 27,1996-
INTRODUCTION
Five years ago a small republic of the
former Yugoslavia, started on its path of transition from an eastern block
socialist government with a planned economy to a democratic government with a
free market economy. Fortunately, the rocky road, described by the World
Bank News in the quote above, has not been long for Slovenia. Although
Slovenia was the most prosperous Republic before the dissolution of
Yugoslavia, after the breakup of Yugoslavia in 1991, Slovenia experienced high
levels of inflation, a drop in the GDP and a tripling of the unemployment
levels[1]. These problems did not stop Slovenia’s transition to
an economic powerhouse in the former Eastern Bloc. However, Slovenia had
several advantages over other Eastern Bloc countries which aided in such a
successful transition. This analysis will present both Slovenia’s
historical and current economic status by examining the political and economic
background, budgetary and monetary conditions, expenditure policies and
assignment, tax structure and administration, and social insurance.
Political and Economic Background
Passing through its transition period from
a centrally planned economy to a market economy, Slovenia has dealt with some
successes and some failures. However, Slovenia’s experiences and economic
policies could prove to be helpful for other economies in transition. There
are many reasons why the transition period for Slovenia has been successful.
The foundation for its quick transformation to a market economy lies within the
positioning of Slovenia in the history of Yugoslavia before and after its
dissolution.
After the end of World War II,
Yugoslavia’s definition of socialism changed. Ownership of the means of
production was defined as ‘social’ rather than ‘state’ and firms were managed
by workers councils. No central planning existed after 1965 and Slovenia, as
well as the other republics in Yugoslavia, were given a high degree of
autonomy. Also Tito, a former leader of Yugoslavia, had deviated from the
‘command economy’ model of the Soviet Institution. As a result, the
Yugoslavian government policy had an emphasis on a greater sense of
autonomy, as far the economy was concerned.[2] The Republic of Slovenia developed its
economic base by increasing the level of manufacturing in the republic as well
as establishing stronger ties with the Western European countries.[3] Slovenia had always been oriented
towards the west, however, due to its northwestern location in Yugoslavia, its
economic interaction with the western countries led it to become market
oriented faster than other Eastern Europe countries.
While Slovenia was a part of Yugoslavia,
it was by far the most successful republic with a per capita income of almost
double that of the national average.[4] The Slovene economy could not be solely
dependent on the national market and therefore they actively traded with Italy,
Austria, Bulgaria and Hungary. In fact, “with only 8% of the population,
little Slovenia brought in 25-30% of Yugoslavia’s foreign exchange.”[5] Also, Slovenia accounted for 20% of the
country’s Gross Domestic Product.[6] As a result of this high degree of
decentralization and positive net outflows, the aforementioned characteristics
provided the economic basis to secession. In May 1990, the people of Slovenia
elected a government whose economic policy, according to Mencinger, " was
set by the premise that prospects of transition to a market economy were
worsening; the economic policy of the federal government mistaken, the existing
economic system unsuitable, and the Federation facing political turmoil."[7] The referendum on independence passed
with 90 percent support. Since that 1990 vote, Slovenia has come a long way
economically.
Slovenia declared its independence on June
25, 1991. The first year for Slovenia was quite difficult. “Real GDP fell 15%
during 1991-92, while inflation jumped to 247% in 1991 and unemployment topped
8% - nearly three times the 1989 level.”[8] The economy continued to plummet until
1993 when it flatten and then head into the positive direction. By 1993
unemployment was at 11% and many companies had lost almost 30% of their markets
due to the bitter conflict in Bosnia and the loss of faith in the region by
international trade partners.[9] However, “[a]t its current rates of economic growth,
[slovenia] it could pass EU members Greece and Portugal in four to five years.”[10]
Current Economic Conditions
Gross Domestic Product
In order to appreciate the current
economic conditions of the country, it is necessary to examine some of the
economic indicators in relation to their past figures. The
first indicator is Gross Domestic Product. According to the EIU Country Report
for the 2nd quarter of 1996, the real GDP growth percentage is slowing down.
In fact between 1994 and 1995 there was a -1.4% increase in GDP.[11] Even though there was a negative change,
the Chamber of Economy in Slovenia states that due to “tremendous growth of
new companies, particularly small businesses, and the shift of foreign trade
westward,” they project that slovenia is expecting to experience a 5-6 percent
increase in GDP in the period up to the year 2000.[12] In addition, “the GDP per capita is
higher than those of Greece and Portugal, double that of Hungary and the Czech
Republic, and it has a comparatively efficient manufacturing sector.”[13] Currently, mining and manufacturing are
contributing the largest percentage to the GDP (figures from 1995 report 31%)
with Trade, Hotels and Restaurants and Financial Market Services at 14% each.
Although, Slovenia continues to depend on manufacturing and machinery production,
other industries continue to grow and keep a diverse base for Slovenia’s GDP.
(See Appendix I) The country of 2 million people has a GDP of more than $18.5
billion.[14] The EIU predicts that the real GDP percentage change
form the previous year will be 3.0 and 4.0 in 1996 and 1997, respectively.[15] (See Appendix II)
Imports and Exports
Other important indicators are foreign
imports and exports. In 1995 Slovenia had $20.8 billion in foreign trade,
goods and services. Slovenia’s international trade has been geared towards
western Europe, especially Italy and Germany.[16] (See Appendix III & IV) One advantage
that Slovenia has had in trading with the Western European countries, is that
Western Europe does not charge any duty on good entering their countries from
Slovenia, except some agriculture, steel and textile products; in 1995 70% of
all of Slovenia’s foreign trade went to the EU.[17] Western Europe has maintained a high
demand for machinery and transport equipment, comprising 27% of Slovenia’s
exports. (See Appendix V &VI) This consistent link with the West also is
evident in the political philosophy of Slovenia.
Inflation
In 1991, when the Republic of Slovenia
first started establishing policy towards a market economy, the inflation rate
reached a peak of 247.1%.[18] This was expected, since the economy was moving from
a highly state subsidized centrally planned economy to a free- market economy.
Fortunately, by 1995 the inflation rate had reached 9.5%.[19] One important quality of this transition
was that Slovenia managed to bring inflation under control without any
balance-of payment problems. Inflation in 1996 thus far is at 10.7% a small
increase form 1995, however, the Chamber of Economy of Slovenia has a positive
outlook for the next year.[20] (See Appendix VII)
Privatization
In 1994, the Slovenian government took its
first steps towards privatization. At first the country observed the other
Eastern Bloc countries and learned from their failures. The companies or
enterprises’ were allowed to choose between five privatization models, which
were then approved by the Agency for Privatization.[21] Most of the companies were sold off to
the workers and managers.
The citizens were given privatization
coupons valued at 100,000 - 400,000 Tolars, depending on the age of the
individual. The coupons could be used to buy shares or invest the money into
securities. Over 45% percent of the coupons were invested into fund
securities.[22] According to Price Waterhouse, over 400 enterprises
have been successfully privatized and another 1000 will soon be at the same
status. However, some companies, such as public utilities, national telecom,
and two commercial banks have not gone through the process; the government
states that these entities will undergo special privatization processes.[23]
Political Situation
On the 25th of June, 1991, Slovenia
declared the end of its political ties with the former Yugoslavia. Although,
the government of the former Yugoslavia did not want the republic to secede,
after a mild show of military force, Yugoslavia gave Slovenia up. Since then,
the National Assembly has been the main legislative body of the Republic of
Slovenia. This national legislature consists of 90 members that are directly
elected by the people for four year terms. In addition, there is the Council
of State that is elected for five years. This council has 40 members, 22
representing local interests, 12 evenly divided between employers, and 6
representing non-economic activities.[24]
Slovenia is currently governed by two dominant
parties who have formed a government coalition, the Liberal Democracy of
Slovenia (LDS) and the Slovene Christian Democrats (SKD). The LDS stems from
the youth movement of the former communists while the SKD originates from a
Christian tradition dating back before the Second World War.[25] The differences in these groups are the
main reasons why there seldom is cooperation in making government decisions.
However, there are other parties with greater opposition: the Social Democrat
Party of Slovenia(SDSS), the Slovene National Party (SNP) and the Slovene
People’s Party (SLS).[26]
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