Country Study, Slovenia: Winning the Transitional Economies Race
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]
One aspect that has helped Slovenia remain stable politically is that
the ethnic make-up is not extremely diverse. Almost, 91% of the population
is Slovene and they are predominantly Roman Catholic.[27] (See Appendix
VIII ) This composition has allowed Slovenia to focus on economic revival
rather than religious ethnic conflict, quite unlike their neighbors to the
south in Bosnia-Herzogovina.
In November of 1996, Slovenia had elections and most of the
incumbents were re-elected. The LDS won the most seats (25) and the
Slovenian People’s Party, conservatives, won the second largest at 19.[28]
This could cause a conflict because, both the liberals and the
conservatives have gained a significant amount of power after this
election. In the coming months the coalitions that form with the parties
with fewer seats could be significant for the political climate of
Slovenia. The far right conservatives, United List of Social
Democrats(ZLSD- former communists), do not back Slovenia’s entrance into
NATO, claiming neutrality should be considered an option; the entrance into
the EU will be supported by the ZLSD.[29] However, economists warn that
Slovenia should not rely on its economic successes in the past but instead
should focus on increasing privatization and address the slowing industrial
production and rising unemployment.[30] The new government needs to
continue to work towards improving the economic state of the Republic if
they expect to become more like a Western European country.
Budgetary and Monetary Conditions
Slovenia began to stabilize its economy before it had gained its
complete independence because inflation was increasing drastically.
Although, Slovenia made a clean break to independence, there were some
costs involved. Slovenia had 33 percent of its exports going to
Yugoslavia, however, with its independence Slovenia had an instant 6
percent decrease in its GDP.[31] This economic shock was small in
comparison to the 38 percent decrease in industrial production Slovenia
faced because of its transitional state. Slovenia stabilized its economy
by October 1992. This was achieved through the introduction of a new
currency, the tolar, and the creation of an independent central bank, the
Bank of Slovenia.
The financial sector plays a key role in the transition process. In
1995, the financial and market services sector comprised 14% of the GDP,
the second largest contributor.[32] In addition, a strong financial sector
is necessary for resource allocation and mobilization, and a prerequisite
for any large-scale privatization scheme.
In 1991, there was a lack of financial regulation in Slovenia, which
produced many problems. Most banks were owned by the firms to whom they
lent. As a result, 30-40 percent of the loans on the books were non-
performing.[33] This combined with a monopolistic structure, lead to
exorbitant lending rates, preventing many viable enterprises from access to
capital. In addition, a healthy banking system requires recapitalization
and investment to improve service. This was not happening right away in
Slovenia. As a result, banks were audited in 1991 and in the autumn of that
year, the Bank Restructuring Agency was founded to deal with these problems
and to help restore competition. Now, most banks in Slovenia have been
privatized except two which remain state-owned.
Monetary Policy
Facing expansionary monetary policy, Slovenia needed some financial
discipline for the newly created enterprises and government, thus, they
created the Bank of Slovenia. The bank was created with the objectives to
stabilize prices and establish a balanced functioning of domestic and
international payments. The law that mandated the Bank of Slovenia,
allowed the bank to execute monetary policy, free from political control.
Another characteristic of the Bank of Slovenia that helped its success, was
that the bank would only give out short-term loans to the government to
cover cash flow problems. This restriction served to be effective in
preventing the accumulation of deficits. In 1994 the Bank of Slovenia
introduced a number of legislative acts which covered the following areas:
* accounting standards and financial statements
* methods of calculation of capital and capital adequacy
* criteria for the classification of balance sheet and off-
balance sheet items
* the levels of provisioning for potential losses
* the level of exposure to a single borrower
* capital investments and fixed assets reducing the capital
This legislation was adopted with the intent to ensure safer bank
operations that conform to the basic principles of liquidity, solvency and
profitability.[34]
In the early years of transition 1991-1992 the Bank of Slovenia
allowed several new banks to start up. Now, in 1996 Slovenia has the
highest concentration of banks in their region, with 31 banks and a
relatively small population of 2 million. The central bank was faced with
the problem of deterring speculators to avoid any kind of banking crisis.
The central bank decided to increase the amount in minimum capital
requirements for banks to $35 million. This move prevented any future mis-
happenings while also pushing banks towards consolidation.
Currency
In October 1991, the Tolar was introduced. As a means of inflation-
proofing, the law allowed contracts and wage agreements to be denominated
in foreign currency so no exchange was required. The deposits in the banks
were converted automatically on a one-to-one basis and 86 billion dinars of
personal cash were converted within a short period of time. The tolar’s
introduction came with ease as more than 80 percent of household monetary
savings were in foreign currency deposits.[35] The Tolar’s exchange rate
quickly stabilized due to a highly restrictive monetary policy which was
aimed at decreasing inflation, increasing stability and strengthening the
domestic currency.[36] Between 1993 and 1995 the Tolar was depreciated to
reflect a real exchange rate. (See Appendix IX) This monetary policy aided
in stabilizing the Tolar and making it fully convertible. On November 19,
1996, 1USD was equivalent to 137.69 Tolars.[37] In addition, the
stabilization allowed for foreign investors to conduct business in USD, DM
or Tolar.
Slovenia put tight controls on foreign currency movements in order to
maintain the stability of the tolar. Since the introduction of the Tolar,
total savings deposits have increased by over 494 billion Tolars. Savings
in 1995 accounted for 23.3 percent of GDP.
Also, Slovenia has a positive balance between the foreign debt and
exchange reserves. By August of 1996, foreign allocated debt had reached
$4.21 Billion and the exchange reserves were at $4.3 Billion. (See Appendix
X) This positive balance shows that the country’s economy continues to
stabilize.
Furthermore, Slovenia has managed to get credit ratings higher than
those of Greece and other countries with longer histories of being
democracies and having market economies.[38] As of May 1996, Slovenia had
the following Country Credit Ratings : [39]
Moody’s Investor’s Service A3
Standard’s & Poor’s A
IBCA A-
In addition, according to Institutional Investors, Slovenia ranks 47th
among 135 countries, with regards to potential areas for investment.[40]
Expenditure Policies and Assignments
In October 1995, the Parliament unanimously approved the 1996 draft
budget presented by Slovene Prime Minister Janez Drnovsek. Expenditures
are expected to be about 570 billion Tolars (about $5 Bill.).[41] A
significant portion of the expenditures are allocated for health, education
and infrastructure. Revenues for 1996 were expected to be 582 billion
Tolars, about
46.5% of Slovenia’s GDP.[42] The surplus is allocated to cover the
Pension and Invalidity Insurance Funds, this action preempts the expected
expenditure of 42 billions Tolars in 1997 towards the Pension Fund which is
a 20% increase from 1996.[43] One-third of the budget will be spent on
Civil Servants salaries and contributions, much higher that the 1995, due
to the desire to increase public employees salaries. Nearly 11 billion
Tolars will be spent on subsidies to exporters for social welfare
contributions, technological development, and for maintaining current
levels of employment.[44] Although, there were no current figures available
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