WHY SLOVENIA WILL NEVER BE LIKE SWITZERLAND

We have written very much about this particular question. One of the main features of small and open economies is that they adjust to real competitive advantages much faster than big economies are capable to do. But if there is a strong presence of anti-growth mentality, the desire for progress towards innovative economy could be a big barrier to potential economic story of success. Many Slovenes instinctly observe their country proudly as "The Switzerland of Eastern Europe." This is an untruthful saying and in this chapter we shall see why this particular remark is not valid.

First, there is a perception of economic freedom. For decades, Switzerland has been ranked among the freest economies in the world. One of the most positive value leaps that made Switzerland an economic miracle has been the presence of tax competition among cantons. The lowest corporate tax rates in the world attracted numerous multinational companies which set their holdings there. Economic freedom in Switzerland has been championed through low rate of government intervention. According to the EIU, the government consumed 12 percent of the GDP in 2004. In Slovenia, it triggered its consumption to 19,8 percent (U.S. Embassy in Slovenia, 2004). Swiss business environment has always been accompanied by one of the highest levels of economic freedom in the region as well as in the world. According to the Index of Economic Freedom, since 1999, Switzerland's economic freedom never scored below 2.00. In Slovenia, the level of economic freedom has been awful. Mostly unfree business environment's been accompanied by trade protectionism which was constantly exercised through unsterilized exchange rate variations, a robust and discretionairy monetary policy which seemed more like an industrial policy since exporting companies were heavily favoured at the expense of importing companies. Monetary stabilization lagged behind the very much needed pace. Hyperinflation pressures and negative interest rates inherited from Yugoslavia vastly increased public debt because crediting was financed through new loans which will have to be repaid in the future. The absence of competition on the banking market made the whole situation even worse. We cannot imagine prosperous economic environment without friendly framework for foreign investors. Inexplicitly noted property rights and politically-driven process of privatization and denationalizen deprived Slovenia from the flow of foreign direct investment. De Broeck and Stock (2001) reported that the liberalization of capital flows in Slovenia was, after Hungary, the lowest rated among the most successful transition countries. This was signficantly led through high rate of insider's penetration on the capital market. Sailing far away from economic freedom, Slovenian policymakers deprived potential foreign investors from the process of privatization. Instant care for "nationally profiled ownership" has been pioneered through the lack of the rule of law. In contrast, according The Fraser Institute's Economic Freedom of the World, Switzerland was constantly placed among top 5 economies in which economic freedom has been advanced through the the confidence in the legal system, contract enforcement and efficiently solid protection of private property rights. Now let's take a closer look at how economic freedom and performance varies between Slovenia and Switzerland. Slovenia has, according to the reference cited above, the most extensive size of government. This inevitably drives back its economic potentials since Robert J. Barro estimated that the reduction of public sector by 10 percent accelerates economic growth by 2 to 2.8 percent. In the field of legal structure and property rights, Switzerland peaked 10th place while Slovenia miserably achieved 45th place. In Switzerland, banking and financial competition ensures sufficient access to sound money while in Slovenia, state-dominated banking sector suffers from the lack of competition and thus makes the access to sound money even heavier. In Slovenia, freedom to trade internationally is very limited. For example, businesses are required to obtain 9 documents for export the cost of which equal $1,070 USD per container while it takes 20 days to accomplish the export. In Switzerland, only 4 documents are needed for export. Deregulated credit, labor and business conditions enable individuals and investors to pursue their plans and productive agenda much easier than in Slovenia where the regulation of those conditions hurts economic growth and threatens the process of real convergence achieved through economic growth and structural advancement.

The creation of institutional power in the hands of those politically priviliged few, persents the biggest obstacles to businesses and individuals who want to pursue their own goals. Switzerland and Slovenia are contrasting the profile of success. If you're an inspired future high-tech enterpreneur you will, as first, have to tackle enormous institutional concentration of power. This chiefly gives support to rent-seeking instead of paying attention to market rules of the game. There is also a strong failure of the education system. Not teaching individuals how productive behavior is important to ensure future progress and structural advancement, means a road to relative stagnation in the long run. According to GEM, Slovenia has the lowest proportion of those adults who want to tackle the challenge and become inspiring entrepreneurs. Only 4,4 percent of fresh entrepreneurial participation presents the lowest rate among advanced countries. It's not just the problem of the government, it's also the problem of individuals as Ziga Metelko says.

In this brief survey I tried to explain through data why Slovenia is not Switzerland as many Slovenes wrongly think. If Slovenia really wants to revise the economic miracle through which Switzerland became the Alpine tiger, it should first finish the process of privatization. Too much power is concentrated in the hands of the government. Thus, the promotion of free-market thinking is the surest way to the reduction of political power. Second, structural reforms in education sector are vastly needed to promote innovations and the improvement of research and knowledge through which the cooperation between scientific sector and the economy will result in higher economic growth. Then there's of course a capital market which needs to be privatized immediately. The role of para-governmental funds needs to be diminished. It would be the worst option if those funds were chiefly chosen to be in the position of guiding an economic policy. To improve competitiveness, foreign direct investment must pour into the market after which job creation will be higher. At last but not least, the people in Slovenia should start to become aware of competitive free enterprise exchange system and its potentials to prosper in the future and become richer. Discretionairy power of public institutions should be strongly limited while free-market institutions and non-interventionist economic policy in accordance with rules, are the surest foundations of future prosperity. It's neither government neither polticial parties, eurocrats or bureaucrats who assures the progress, prosperous and ambitious individuals do.

I would like to end this post in the words of Benjamin Franklin: "Those who would sacrifice liberty for security deserve neither."

Reference:

Rok Spruk; Slovenia 2006: How the Country Wasted the Opportunities of the Century, Capitalism & Freedom, December 2006
http://rspruk.blogspot.com/2006/12/slovenia-2006-how-country-wasted.html

Rok Spruk; Tax Competition is What Made Switzerland an Economic Miracle, Capitalism & Freedom, 2006
http://rspruk.blogspot.com/2006/12/tax-competition-is-what-made.html

The Index of Economic Freedom, Heritage Foundation, 2006
http://index.heritage.org

Rado Pezdir; Strukturni dejavniki odlocanja ravnoteznega realnega deviznega tecaja tranzicijskih drzav na poti v ERM2, Ljubljana, 2004
http://www.cek.ef.uni-lj.si/magister/pezdir405.pdf

Mark De Broeck, Torsten Slok; Interpreting Real Exchange Movements in Transition Countries, IMF Washington, 2001
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=276074

Fraser Institute; The Economic Freedom of the World, Fraser Institute, 2006
http://www.freetheworld.com/2006/1EFW2006ch1.pdf

Ziga Metelko; Podjetnistvo na kvadrat (Squarred Enterpreneurship), Finance, 1/6/07
http://www.finance-on.net/?MOD=show&id=171978 (online subscription required)

Lars P. Feldt, Emmanuelle Reulier; Strategic Tax Competition in Switzerland: Evidence from a Panel of the Swiss Cantons, CESifo Working Paper Series No. 1516
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=796704