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 levels1. 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. ............