Slovenia - 25 years of Independence: An Economic Perspective
But solid macroeconomic fundamentals and far-sighted, yet politically difficult choices, i.e. stability and continuity, prevented Slovenia from falling deeper into recession than it did. Despite being a small, open economy, the country has managed to offset the negative consequences of economic downturns in the international environment relatively well, thanks to its traditionally solid economic backbone. With excellent infrastructure, a well-educated workforce and a strategic location between the Balkans and Western Europe, Slovenia has one of the highest per capita GDP's and is one of the wealthiest countries in Central Europe. These achievements have been attained through hard work and the tough choices since independence.
A gradual transition
A well-educated workforce and effective institutions have significantly contributed to the overall economic performance of Slovenia, although the success stories are often taken for granted. When it comes to the transition from the communist bloc to capitalism, Slovenia is the epitome of a gradual approach, while Poland stands at the opposite end of the spectrum with Balcerowicz's "shock therapy". If the latter case has been widely, perhaps bitterly debated, the former has rarely been under the spotlight.
Slovenia's gradualist approach towards structural reform was crucial, in particular with respect to liberalisation and privatisation. The country opted for a gradual regime change as it was considered that such an approach would minimise the risk of profound and rapid structural changes which would ultimately backfire on the economy. Tiny Slovenia had less than eight percent of the population of Yugoslavia, yet Slovene ﬁrms accounted for an estimated 33 percent of Yugoslav exports. With a degree of price liberalisation higher than in other post-Communist countries of a similar size, Slovenia was in a favourable position to start the transition with good initial conditions. Many of the distinctive features of the present day economy were already long-standing peculiarities at the time of independence.
Slovenia was the principal trading arm of the former Yugoslavia, itself the most open economy in Central and Eastern Europe (CEE). Most of its trade was with more advanced market economies in the West: Germany and Italy being Slovenia's main trading partners in 1990, together taking 40 percent of exports. Today, these countries still top the chart of Slovenia's trading partners, although with a smaller percentage, the main difference being that some of the other former Yugoslav Republics now also account for exports. In addition, enterprises in the former Yugoslavia were characterised by a system of self-management and social capital, the so-called ''market socialism''. This system of decentralised control, where markets were allowed to play a signiﬁcant role in the allocation of resources throughout the economy, stood in contrast with the much more centralised economic management that prevailed elsewhere in CEE.
In continuity with the past, independent Slovenia could rely on cheap inputs of labour and raw materials from the rest of the former Yugoslav Federation as the country readily inserted itself into the supply chains of Austrian, German and Northern Italian manufacturers. Quite inevitably, Slovenian exports went in equal proportions to the West, the renewed Eastern bloc, and the other South Slavic nations. This success, due to favorable initial conditions, is encapsulated in the survival of well-recognised and much-appreciated Slovenian brands, from appliances (Gorenje) through to fashion to pharmaceuticals (Krka, Lek). These companies managed to undergo the transition relatively smoothly to maintain and further grow their market positions, while other vulnerable industries, such as the textile industry, suffered from international competition and gradually disappeared.
The run-up to EU accession brought significant challenges for Slovenia. After 1997, virtually the whole CEE region moved towards what was known as the Hungarian way: privatisation to transnational enterprises, especially in the manufacturing, banking, financial, retail and energy sectors. Only Slovenia decided to keep the economy in national hands. The difference is crucial: because of the economic structure, Slovenian firms remained independent from the global production chains of multinational corporations and are just as export-oriented as the assembly plants of the transnational firms elsewhere in CEE. However, in contrast to other countries in the region, the profits stayed in Slovenia, paving the way to further integration into western economic institutions.
Slovenia became the first 2004 EU entrant to adopt the euro, on 1 January 2007. In March 2004, Slovenia became the first transition country to graduate from borrower status to donor partner at the World Bank, while in 2007 it was invited to begin the process for joining the Organization for Economic and Cooperation Development (OECD), a group of 34 advanced countries that discuss and develop economic and social policy, to which it became a member in 2012. However, while state presence in the economy was vital to manage the first years of economic transition, globalisation forces did not stop at Slovenia's doorstep, nor should the country have shielded itself from it. The long-delayed privatisations, particularly within Slovenia's largely state-owned and increasingly indebted banking sector, fueled investor concerns in 2012 when the global economic situation became bleak. In 2013, the European Commission granted Slovenia permission to begin recapitalising the ailing lenders and transferring their non-performing assets into a "bad bank" which was established to restore bank balance sheets. Strong demand by yield-seeking bond investors for Slovenian debt helped the government in 2013 to continue to finance the country independently, a great sign of confidence from the international markets under the circumstances.
In retrospect, it is easy to say that the gradual approach was the correct one, as Slovenia outperformed the other transition countries in nearly every macroeconomic indicator. Economic, social and political stability are considered to be the most prominent advantages of the gradualist approach. Indeed, shocks have been largely avoided. While good initial conditions helped the country manage the earliest stages of transition at relatively low cost, it was the implementation of effective stabilisation policies that then helped the economy recover its strength. With stable economic growth and no major macroeconomic imbalances, losses of output and jobs have been kept small and social peace preserved. Per capita income, while lagging behind the EU average, is comparable to that of Greece or Portugal. However, some structural rigidities remain, as evidenced by the small share of the private sector in the economy. In recent years, the government has embarked on a program of state asset sales intended to bolster investor confidence in the economy and increase competitiveness. Perhaps, once again, Slovenia could be on the road to a gradual, successful transition.