Slovenia is a small country. But despite being small, its economic potentials are astonishing. Throughout the period of economic transition to free market economy, the government never imposed radical structural reforms that would boost the economic growth of this small country. Far away from liberal economic policy, the government rather chose the gradual model of economic change which is now paying its price. In the beginning of transition, Slovenia emerged as the richest former communist country. Being the richest one in the group of ex-communist countries, did not give economic policymakers very much needed engine to become richer and to become the leading innovator in Eastern Europe. After the country won the independence struggle, a bulk of serious problems remained in action. Slovenia inherited hyperinflation from Yugoslavia. The policy of exchange rate depreciation embroiled a highly questionable monetary policy of the central bank. In fact, discretionairy exchange rate regime had become a tool in making decisions of how to guide the economic policy. As a result of this practice, the inflation bubbled rapidly as monetary emissions measured as the increase of monetary aggregates. According to the Index of Economic Freedom, the presence of economic freedom itself in Slovenia has constantly been the lowest among the economies in transition. However, new center-right government pledged to start rapid privatization, deregulation and liberalization. It promised to impose structural reforms in order to let the economy grow and international competitiveness rise. It set bright promises but those shining commitments turned into dismal performance. According to IMD, Slovenia has advanced from 52th up to 45th place on the scale of competitiveness but the most striking information is that in the field of government policy, Slovenia stuck at the same rank. World Economic Forum published Global Competitiveness Report on an annual basis. According to the referrence, Slovenia's level of competitiveness declined. 33rd place is not a flattering position.
Now let's take a closer look where Slovenia actually wasted "golden opportunities"
Labor market reform has been Slovenia's worst tragedy ever since. Post-communist trade unions enjoy a vast political support. Throught the convergence period, they were the main drivers of economic policy. They vastly oppose labor market liberalization in order to make it more flexible. Empirical studies show that liberal labor code and flexible labor market enhence economic growth while also the level of productivity goes up. Productivity itself requires openness. In Slovenia, labor costs per capita are growing enormously. Tax burden measured as a percentage of the GDP, is getting close to 40 percent. Progressive (communist) tax rates on individual incomes are still high though government changed the progressivity of tax rates only for a little bit. Since labor costs are high, employers hardly employ highly-skilled and productive individuals. Coupled with competitive businesses, they are the main component of technologically-innovative economy. In Slovenia, labor market was never radically reformed. Data show that the inudstrial restructuring of the state-owned companies in the beginning of the 90s, took the slowest pace eventually possible. Pension reform was catastrophic. The indexation of pensions with the growth of wages will leave terrible impact on the stability public finance. It is expected to see public debt growing and budget deficit continuing to slope down. The privatization of the state economy accelerated but it took its blown with a minimum degree of transparency through which the government consolidated its position in the economy. The privatization of the largest state-owned companies seems like a never-ending story. Public companies are being sold to politically priviliged. Government's role in the economy extends through a wide range of area, from services to media. Putting all this together, the international competitiveness of the public companies is low as well as value-added is low. In order to get on track, the companies need to be sold to the best possible buyer regardless of his nationality. A strong infusion of foreign direct investment could help to raise the level of the productivity of the firms as well as it would create numerous opportunities for unemployed. In 2006, Slovenian students valantly opposed education reforms. They opposed more private education institutions and they also heavily resisted on cutting some politically given benefits through which bureaucrats from student organization (SOS) exercised the role of rent-seeking actors at the expense of taxpayers. There is none Slovenian university among top 500 in the world. Perhaps the most tragically obscured political shame in this year has been the lack of the liberalization in the financial sector. Banking sector, particulary the unavailibility of the investment capital to venture entrepreneurs, is one the main degressors of economic growth and competitive entrepreneurial development. State-owned banking and insurance control approximately 50 percent of the banking sector assets. KBC, Beligian insurance and banking company, was a saving partner for the Nova Ljubljanska Banka, but political pressures once again showed aggression and hostility towards foreign investors. Only one-third of Slovenia's banking assets are private and that the state effectively directs the three largest banks. Moreover, the government effectively controls 50 percent of total banking assets. On the other side, the protection of private property rights in Slovenia has been constantly low, judiciary has emerged as a strongly influential political group which exercies its role through rent-seeking. It has also vastly opposed setting wages in accordance with efficiency, productivity and with the number of cases effectively resolved. The difficulty of commerical contract enforcement is heavy. The difficulty involves 25 procedures, 1350 days and 15,2 percent of the total debt following the evolution of payment dispute. Capital market is marred by insider trading with information. The Slovenian court system is marred by inadequate staffing and slow procedural progress and is in need of further reform. Slovenia wasted a bulk of opportunities in 2006. Perhaps the greatest opportunity ever offered was the flat-tax proposal. It couldn't be found more progressive step forward than the simplification of the tax system. Flat-tax would give companies a stimultaneous track to increase profits and capital gains in order to reform companies' structure throughout the convergence towards technologically-advanced economy based upon innovation, value-added and the growth of total factor productivity.
Year 2006 has also been marred by political shame in Slovenia. The crime rate exercised through illegal methods on capital markets did not reduce. The legislation , the aim of which is to prevent capital crimes to happen, is still very inexplicit. The judiciary doesn't exercise its role of punishing illegal capital transactions and payment. It also heavily protects companies whcih collapsed primarily due to dusty management. It is sad to see how such politically influential "transition businessmen" are heavily protected from very much deserved sanctions. There is no politician in Slovenia who would be willing to investigate such crimes.
From the perspective of an economist, all Slovenian politicians as well as political parties behave like socialists. In fact, politicians cannot be as much trusted as they are in Finland, example. In Slovenia, every politician has exercised its role through the participation in sections of communist political party, i.e. the party whose origin is totalitarian. I regret the fact that Slovenia did not expell communist members from public institutions. Everyone would benefit from this.
I wish a Happy New Year to the visitors of my blog and I wish them successful efforts in 2007 and also lots of happiness and personal satisfaction.
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