Tuesday, September 04, 2007


Janez Jansa, Slovenia's socialist prime minister, once again demonstrated that he's not keen on macroeconomics and the explanation of inflation. In today's radio speech he mistakenly explained the causes of currently higher inflation in Slovenia than in other countries in the EMU, in the fashion of an old Soviet rethorics which could be read from Lenin's textbooks. Perhaps Slovenia's prime minister should read today's column written by Mićo Mrkaić published in business daily Finance, to learn the fundamentals of inflation.

In addition, Slovenia's prime minister, stated that Slovenia is emulating an Irish model since Ireland faced a significant GDP growth throughout 1990s and periodically higher inflation, so according to the words of Slovenia's prime minister, Slovenia is now generating a strong and stable long-term GDP growth. If Slovenia's prime minister had some basic economics in his mind, then he'd know that the time difference between two countries crucially depends on basic macroeconomic parameters such as price-adjusted income per capita and the rate of GDP growth.

Let's take two countries; Ireland and Slovenia. The question what is the developmental distance between Ireland and Slovenia. The equation is written in the following form:

(1) Yslo(0)(1 + Rslo)^t = Yire(0)(1 + Rire)^t

where Y is the income per capita, and R is the rate of output growth. To obtain the result expressed in time period, the upper equation needs to be logged:

(2) t = ln(Yire/Yslo)/ln((1 + Rslo)/(1 + Rire))

which is approximately similar to

(3) t = ln(Yire/Yslo)/Rslo - Rire

According to World Bank, in 2006 Ireland's GDP per capita in terms of purchasing power parity was $35 540 USD and Slovenia had $23 960 USD of GDP per capita (PPP). Assume that Slovenia's estimated GDP growth rate is 4 percent annually while Ireland's long-term growth estimate is 3 percent. If so, then using (3), it would take 40 years for Slovenia to catch-up Ireland's GDP per capita in terms of purchasing power parity.

The issue can be launched differently. Assume that numbers of macroeconomic aggregates discussed above are the same and that we want to know what should be the growth rate if Slovenia is set to catch-up Ireland's GDP per capita in 20 years. The equation is then the following:

(4) Rslo = (Yire/Yslo)^(1/t) (1+Rire) - 1

where R is the required "catch-up" growth rate, t is the time (length) of the catch-up period and Y is the GDP per capita (PPP). Thus, if Slovenia wanted to catch-up Ireland's GDP per capita in terms of purchasing power parity in 20 years, the growth rate would have to equal 7,4 percent annually. If desired "catch-up" time period is reduced to 15 years, then Slovenia's output would have to grow by 8,4 percent annually. Given the negative side-effects of ageing population, labor supply reduction, and of the external pressure on tax-funded generational acccounts, growth estimates for Slovenia show that in the long-run, the growth rate is ought to reduce to the range between 2,5 percent and 3 percent accountably.

As shown above, Slovenia does not emulate an Irish model of economic miracle as Slovenia's prime minister is saying. Given the scope of current growth dynamics, Slovenia emulates a typical Keynesian debt-financed economic growth based on chain effects of stimulus to construction sector. In the short run, the growth rate is temporarily high but in the long-run, when the dynamics of generating output growth is exhausted and fiscal and debt indicators burdensome, the rate is comparatively low and hampered by an upward pressuring inflation rate and consumption-inflated indebtedness of household and fiscal sector.

In addition, in this year's Fraser Institute's Economic Freedom of the World, Slovenia is ranked 91st in the world regarding the scale of economic freedom. Slovenia was surpassed by nearly all post-communist countries in most areas. Ranked on the same place as Mozambique, Ghana and Papua New Guinea, realistically explains the state of economic freedom in Slovenia. High tax burden, weak protection of property rights, extensively sized government sector and highly restrictive labor market definitely explain the low score of economic freedom in Slovenia, the most socialist EU republic.

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