Country Study, Slovenia: Winning the Transitional Economies Race

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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,