Thursday, January 03, 2008

SLOVENIA: GERMANY OF THE BALKANS

By January 1, 2008, Slovenia took over the chairmanship of the EU presidency. In its latest article Slowenien: Deutsche vom Balkan, Der Spiegel described Slovenia as Germany of the Balkan region. Although the EU presidency would normally mean a final stage in leaving the Balkan region, such argument is very far away from the truth. My colleague Rado Pezdir once wrote a brilliant article on how unambitious Slovenian government really is in its intentions to discuss presumably relevant topics on behalf of EU presidency. Rado wrote:

"...the EU as it is today, is definitely not sustainable. Slovenia integrated into the union of nations instituted upon market capitalism. Regarding the negative experience we had with previous regimes of dictatorship, rational voters would agree that the only positive feature of current Slovenian government is that the latter attempts to pursue the agenda over democracy and market capitalism. Everything else is a zero-sum game as it was in Habsburg Monarchy, Kingdom of Yugoslavia and Tito's communist Yugoslavia. That's why, bluffing with all sorts of speech, banquets, inaugurations and fantasies about the relevancy of Slovenian Republic in foreign policy, will nevertheless be a clear signal, that Slovenian government has absolutely no idea what is it doing in the European Union. Nonetheless, given the current state of political and economic climate, Slovenia could easily be integrated into the African Union, leaving behind local monopolies and nation-wide cartels."

Source: Rado Pezdir, Croats and Banquets - The Radius of Janez Jansa's Government, Finance, July 9, 2007 (link - subscription required).

In 1991, Slovenia emerged as the wealthiest former communist state with the highest GDP per capita in Eastern Europe. That was a sign that Slovenia's socialist politico-economic system allowed some (!) private initiative. For example, manufacturing companies were allowed to operate with private means of production, but only if there were five or less employees. However, the entrepreneurship under production means of private property and ownership was strictly prohibited. The manufacturing sector was hardly seen. Later, the hope of the most successful economy in Eastern Europe suddenly disappeared.

Slovenian politicians quickly embraced the idea that the country must progress gradually by a beguiling path of non-reform. The consequences were terrible. The mainstream economists embraced the idea that foreign direct investment must be highly limited and prohibited in some sectors. Therefore, the privatization was delayed. By 2005, Slovenian government ownership share in major Slovenian companies was 35 percent of the GDP; the highest share in Eastern Europe.

Government ownership can be seen everywhere, managed by para-government funds - in Krka (pharmaceutical company), Triglav (insurance company), NKBM (banking company), Nova Ljubljanska Banka (banking company), Gorenje (household appliance producer), Petrol (oil company) etc. Slovenia has an unreasonably high tax wedge, among the highest in the EU. Taxes levied on labor supply and productive behavior negatively affect economic performance. High tax burden in the share of the GDP does not stimulate productivity growth and the growth of GDP.

There's a dozen of empirical arguments in favor of private ownership. Capital management under private ownership is better at approximizing the information and seeking cost-efficient solutions needed for a successful investment and return on equity as well as for other parameters of the firm. At the same time, looking at the productivity data, Slovenia hasn't yet reached a convergence of the productivity in line with EU15, EU25 and EU27.

The political map of Slovenia is perhaps the most terrible saga that has been continuing in historical cycles. Currently, there is no political party that would launch reform agenda to boost an ambitious political program in favor of higher and stable growth in the long run. Slovenia's economic policy is based on Keynesian ideas such as heavy public investment, inefficient public administration and government intervention into the free market. Each year, the World Bank composes a ranking of countries in accordance with the ease of doing business. This year, Slovenia was ranked as 55th most friendly environment for doing business.

This year's rank has arrived from 53th place last year. For example, in Iceland (link), the enforcement of commercial contracts is easy and payment disputes almost do not exist. In average, it takes 393 days to reach a full enforcement of commercial contract until the actual payment. In Slovenia, it possibly takes (link) 1350 days until the commercial contract claims and obligations are fully enforced after dozens of lawsuits and payment disputes. A research by Slovenia's Office for Macroeconomic Analysis and Development has shown that the major obstacle to starting a business is weakly protected rights of entrepreneurs regarding payment disputes.

Slovenia's Balkan ethics lies firmly into its unique political culture. Recently, Johnny Munkhammar wrote a book entitled Guide to Reform (here and here), where he showed how policymakers can achieve great results and win re-election by implementing long-range economic reforms. Slovenian political parties, whether they are left or right, always opposed full privatization, pro-growth tax policy, labor market deregulation, the rule of law and reductions in public expenditure.

Instead, interest groups control all types of decision under public policy. Trade unions, for example, roared against tax reform, denied labor market deregulation and stood firmly against education reform. Urban planners have controlled nearly every possible instrument that could enable the liberalization of housing sector. The ongoing consequence is that the prices of urban flats, housing and land are stratospheric. Slovenia's agricultural lobby can easily be compared to the "state-within-the-state".

Besides holding a complete control over land resources, they boost artificially high land prices, given a flat downward sloping curve of land supply. Protectionism has arrived at the cost of enormously high consumer housing prices. In addition to the pedigree of central planning, Slovenian Apartment Fund, under government control, runs a policy of full price control. Nevertheless, price controls fail sooner or later.

Slovenia's political system is marred by dusts of old-style protectionism and anti-competitive mentality. State Council is holding an enormous power of public decision-making. It can simply block the decisions which have been democratically approved by the parliament. State Council is a symptom of Mussolini's idea of the corporate state where the interests of stakeholders are firmly protected in the economic system.

In addition to obscure institutions such as State Council, there is also an ESS, which could be called Economic Schutz Staffel. It is a cooperative body called Economic Social Council where employers, government and trade union impose wage-control policies. This particular council indeed has terrible consequence for the growth of living standards which are, by the wisdom of economic theory, determined by productivity. In the long run, productivity is everything.

At last, Slovenia's blurred image is further degenerated by the inefficient and cumbersome judicial system. Property rights are very weakly protected. According to Heritage Foundation's 2007 Index of Economic Freedom, Slovenian courts are inefficient and procedurally slow with a bulwark of reports about legal corruption. The latter is widespread. It enables everything what is legally prohibited under the rule of law.

In Balkan region, Slovenia is the most developed country according to official parameters. Its eastern neighbors call it "Slavic Switzerland" or "Balkan's Germany" as Der Spiegel wrote in the abovementioned article. The reality is quite different from official reports of a happy sub-Alpine nation enjoying an ever-lasting prosperity.

This myth has been erased when Slovenia entered the European Monetary Union when country's inflation skyrocketed because of structural inflexibility. But nevertheless, depression, anti-competitive mentality, status quo, degenerated legal system, slow economic progress, violence against intellectual and productive individuals, psychological torture, public unsafety and spurring corruption are the best signs of country's international rank. However, structural misery cannot escape the pen of history.

Rok SPRUK is an economist.

Copyright 2008 by Rok SPRUK

6 comments:

denis bider said...

Well, I think the "Germany of the Balkans" comparison is apt. Like Germany, Slovenia is fairly stable. Like Germany, Slovenia is burdened with socialism and an absence of reform. Like Germany, Slovenia has low GDP growth. So, the comparison is somewhat apt, but it's not a compliment for Germany.

CresceNet said...

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Rocks said...

It surely isn't an admirable comparison for Germany regarding its "Golden Age" of "Westdeutsche Wirtschaftswunder" when free-market reforms and ordoliberal initiative boosted the growth of German economy.

True, Slovenia benefited enormously from Austrian politico-economic integration before it slid into the Yugoslavia. In 1939, Slovenia's national income per capita was about 80-85 percent of Austrian income per capita. Politicians and even some economists in Slovenia are not aware of the consequences of low growth epidemics. If Slovenia's GDP growth rate is just 0,7 percent lower in the long run (3 percent instead of 3,7 percent), it would catch-up Austrian GDP per capita (PPP-adjusted) level in 58 years rather than in 30 years.

I believe that Slovenia's status of the wealthiest former communist state did not work well as it didn't give politicians enough courage to implement long-range pro-growth tax, structural and economic reforms. Besides Croatia, today, Slovenia is the worst-performers regarding the pace of economic reforms in South-Eastern Europe. Even "Republika Srpska" recently decided to dramatically reduce tax burden and implement a low flat tax rate.

And after such a disappointing path from the independence onwards, it's quite understandable that Slovenia is not an admirable comparison for Austria and Germany. Regionally, Austria is very developed. Eastern Austria (Oberoesterreich), Western Austria (Voralerberg, Tirol) and Vienna region as well. When Austria geared up the agenda of economic reforms, deregulation and the liberalization of entrepreneurshup, Slovenia was swimming in the pool of socialism as it sailed decades away from advanced nations.

Regards,
Rocks

Anonymous said...

This story is one big LOL...

Anonymous said...

Slovenia is not in the Balkans. Get your geography straight.

Anonymous said...

Please. Slovenia has had the highest GDP per capita growth in the Eurozone for the period 2004-2008 respectively:
2004: 4.3%
2005: 4.4%
2006: 5.9%
2007: 6.2%
2008: 4.4% (Estimate)