IS SLOVENIA THE NEXT SICK MAN OF EUROPE?

Recently released data from OECD Economic Outlook (link) suggest that the recessionary period is likely ending as the output in world's major economies is reversing the trend of the past year. In 2009, the U.S economy is expected to contract by 2.8 percent annually. Germany, suffering from a significant decline in inventory orders and foreign demand, is set to contract by 6.1 percent and Japanese economy is likely to decline by 6.8 percent. The end of the global recession will be continued by a slow recovery as the economic growth in the OECD economies is most likely to reach 0.7 percent in 2010 after a 4.1 percent decline in 2009.

Besides Israel and Estonia, Slovenia is the next country to join the OECD. The macroeconomic outlook for Slovenia, unfortunately, remains sluggish. In Q2:2009, Slovenian economy contracted significantly. The output decreased by 9.3 percent. In Q1:2009, the economic activity decreased by 9.However, the data on GDP decline is too optimistic compared to the real sector. According to the latest availible data, the industrial production in April contracted by 28.26 percent, followed by double-digit consecutive declines each month. Investment, which in 2008 accounted for 28.9 percent of the GDP declined significantly. In Q1:09, the business investment contracted by 32.3 percent.

The pre-crisis boom in business investment was surged by quantitative easing and low interest rate which contributed to historic highs of credit stock. In addition to deteriorating macroeconomic outlook, the export of goods and services, which once used to be the core engine of Slovenia's economic growth, contracted by 21.1 percent in the Q1:2009. Thus, during 2008, the economic activity experienced unusually high rates of economic growth spurred by investment, foreign demand and historically high consumption spending. Throughout 2008, the economy was starting to exhibit strong signals of overheating.

By the beginning of the crisis, the economic policy pursued a radical debt-driven infusions of liquidity in the banking and bailouts to the real sector. Consequently, the state of public finance changed dramatically. For decades, Slovenia maintained on of the lowest public debt/GDP ratios in Europe. As a fiscal measure, low public debt had been of the merits that enabled the fulfillment of convergence criteria before entering the EMU.

As a result of government intervention, debt guarantees and surging public spending, the public debt is likely to soar from 21.5 percent of the GDP in 2008 to 32.6 percent of the GDP in 2009. The public debt is expected to rise further. If the current trend continues, the public debt is estimated to soar up to 53.7 percent by 2013 (link).

The black line and the left axis on the graph show general government balance while the left axis and yellow bar show public debt. Both categories are expressed in percent of the GDP.


Public debt and general government balance as a percent of the GDP (2004-2013)

Source: Ministry of Finance (link)

As we can see, the primary budget deficit will move from -0.27 percent of the GDP in 2008 to 6.58 percent of the GDP in 2009. By 2013, the deficit is estimated to move to -7.4 percent of the GDP. Compared to small and open economies, Slovenia's primary budget deficit is higher than in most small and open economies. It is, for instance, higher than in Denmark, Greece, Austria, Czech Republic, Finland, Luxembourg, Netherlands, New Zealand, Slovakia, Sweden, Switzerland and Norway. As far as I know, Norway is the only developed country without budget deficit in the near future (According to the OECD and Norges Bank, Norway will post 8.6 percent budget surplus in 2009, down from 18.8 percent in 2008. In 2010, the budget surplus will likely increased by 0.4 percentage point).

The government intervention in the real sector further regulated the labor market by introducing subsidies to employers to retain the employees and discourage layoffs to prevent the rise in unemployment. However, recent data suggested that public sector employment grew significantly while private sector employment declined respectively. In Q2:09, private sector employment decreased by 9.3 percent. Public sector employment, on the other hand, increased by 1.4 percent on the annual basis.

For at least two decades of transition, Slovenia's gradualist economic policy favored rigid and inflexible labor market embodied in collective bargaining, high tax rates on labor supply and barriers to entry. The economic policymakers created discriminatory labor market structure which still discourages young graduates from entering the labor market after graduation. Consequently, unit labor costs are among the highest in the EU. Recently, The Economist snapped a nice chart, showing that tax burden on labor supply in Slovenia is the highest in the world (link). In combination with ageing population and of the youngest retirement generations in the world, the abovementioned labor market dualism further encouraged policymakers to raise health and social security contribution rates. It lead to one of the lowest growth rates of private sector employment in the EU. It further lead to the highest tax wedge in the EU and the unusually high growth of unit labor cost relative to productivity growth. In addition, strongly regulated labor market is the major cause of Slovenia's low productivity convergence relative to the EU15. The majority of central European and Baltic countries have been lowering the productivity gap behind the Euroarea much faster than Slovenia.

In 2009, Slovenia reach 90 percent level of EU27's GDP per capita. Compared to the Euroarea, Slovenia reached 83 percent level of the GDP per capita. Compared to EU15, which is a reasonable measure of comparison, Slovenia reached 81.7 percent level of GDP per capita. Compared to Switzerland, Slovenia sustains only 64 percent level of Swiss GDP per capita (link). Interestingly, if Slovenia were a part of the U.S, its GDP per capita would be at the 54 percent of the U.S level, even lower than in Mississippi and West Virginia - the least developed states in the U.S.

Although Slovenia is often cheered as being the "Switzerland of the East" and the most developed former communist country, its economy will likely resemble slow growth in Italy, Germany and France rather than dynamic growth in Singapore, Hong Kong, Australia and Switzerland. Current economic policies are the recipe for eurosclerosis, experienced by pre-Thatcher Britain. If such pattern of economic policy will continue, the Slovenian economy will, sooner or later, exhibit economic stagnation with low economic growth, onerous tax burden, high structural unemployment and rapidly ageing population.

THE 2009 RECESSION AND ECONOMIC RECOVERY IN SLOVENIA

Earlier this morning I was informed by Bloomberg (link) that Slovenia officially entered the recession for the first time in the last 16 years. The information has not been surprising since major economic forecasts predicted a significant downturn in the light of deteriorating exports and investment. The data pointed out to a significant economic decline. Gross capital formation shrank by an astonishing 32.3 percent. On the other hand, private household consumption grew slightly by 0.1 percent while government spending grew by 3.8 percent.

The outbreak of the financial crisis led economic policymakers to pursue a robust fiscal stimulus to compensate the decline of investment and consumption spending. Before entering the EMU, Slovenia had to comply with Maastricht criteria, including anchoring the budget deficit at the maximum level of 3 percent of the GDP. This year, the budget deficit soared over 6 percent of the GDP, suggesting a growing pressure on public debt. Earlier this month, John Taylor, a professor of economics at Stanford, wrote a great article in FT discussing the hidden dangers of a growing government debt (link). When credit rating agencies downgraded the sovereign debt outlook for the United Kingdom from "stable" to "negative", it should be obvious to economic policymakers that fiscal stimulus failed the cost-benefit analysis and hardly consolidated the midterm economic outlook and recovery.

Recently, Donald Kohn, the vice president of the Fed expressed concerns about fiscal deficit regarding inflationary outlook (link). The reaction of the fiscal policy included a typical fine-tuning infusion of government spending which produced little effect. Of course, it should be noted that a rather drastic expansion of public debt is not only a consequence of an expansionary fiscal policy but also of significant bailout loans from IMF. IMF's $2.4 billion bailout loan raised Latvia's public debt from 9 percent to 15.2 percent of the GDP in 2008 (link). By 2010, it is estimated to go up to 46 percent (link) of the GDP. The explosion of public debt is a particular concern and an obvious consequence of economy's overheating. The IMF recently reported that overall bank credit to private sector settled at 95 percent of the GDP. Complementary, external indebtedness rose to 130 percent of the GDP (link). Clearly, Bank of Latvia failed to act as a lender of the last resort with unbuilt foreign reserves basis and a balance sheet that couldn't sustain the bailout of the financial sector.

Iceland, definitely one of the biggest victims of the financial crisis has recently been downgraded on sovereign debt by Moody. The assets by the outward-oriented banking sector, fuelled by a stunning interest rate differential and carry trading against uncovered interest parity, skipped the size of the economy by 900 percent. The Moody predicted that Icelandic public debt will reach 145.3 percent in 2009 and shall decline slowly and gradually.

On the annual basis, Slovenia's small and open economy declined by 8.3 percent which is one of the most significant declines in the EU after Baltic tigers and Ireland. The European Commission predicts 3.4 percent decline in output by 2009. Exports are expected to decline by 11.8 percent. Small and open economies are vulnerable to economic crises and external shocks, particularly because its trade-to-GDP ratio stands at 60 percent of the GDP and beyond.

This year's quite striking decline has much to do with Slovenia's main macroeconomic backbones. The inflation rate, which grew significantly during the 2007 economic expansion when GDP growth stood at 6.8 percent annually, has not increased. That is because Slovenia, as other EMU members, experiences the recessionary output gap and also because there were no inflationary shocks from the oil market. The third frontier of explanation for a deflating pressure on economic activity in Slovenia is that during the recession spillovers from the tradeable sector strongly affected domestic retail and service sector. In March 2009, the unemployment rate stood at 8.4 percent. The combination of a weak labor market and significant downturn of private consumption spending weakened the bargaining power of unions over wage determination, although wages in the public sector recently grew by double-digit rates (link). In May, the monthly rate of inflation reached 0.6 percent respectively (link). The industrial production, one of the keenest signals of economic activity, for instance, declined by 20 percent in March 2009 (link). The lack of productivity shocks such as restructuring and innovation further worsened the outlook of industrial production.

In a Keynesian spinning turn, Slovenian government pursued a dramatic fiscal expansion coupled with an easy money policy from the ECB's lowest baseline interest rate since early 2000s. In addition to horrible state of public finance, the government enforced a set of measures to protect the major banks from the failure. After the failure of Lehman brothers, it became obvious that the credit flow to state-owned companies for purposes of acquisitions and oligpolistic consolidation will inevitably decrease significantly as the banks' balance sheets were too soft and, of course, too small to secure loans to the real sector. Not surprisingly, the banks performed dismally at the stock market. SBI20, Slovenia's headline stock market index shrank by an astonishing 68 percent between 2008 and 2009 (link), suggesting that P/E ratios and earnings forecasts were mostly overvalued and distorted by the insider information and inadequate and unreliable signals.

The recent staff report by the IMF on Slovenia (link) suggested the immediate enforcement of structural reforms to boost economic recovery. The historical track record of macroeconomic and structural reforms is quite sluggish. During the financial and economic crisis of 2008/2009, the Slovenian government raised government spending and tax burden.

Additionally, it further regulated the labor market by preventing firings through wage guarantees to temporary unemployed whom employers are obligated to reemploy as the economic recovery goes further. Is this a reminder that a totalitarian political economy is still alive? Yes. It seems that economic policymakers ignored the overwhelming regulatory burden in the business environment (link), extremely regulated, inflexible and costly labor market (link), the lack of scale to develop sound capital and financial markets (link) (link), unfinished privatization, high tax wedge and the lack of judicial enforcement in defending the rule of law and the protection of property rights.

These structural and macroeconomic reforms would strengthen the midterm growth outlook and significantly boost the economic recovery. Nonetheless, these reforms would not inhibit the economic growth in the long-run. The IMF's World Economic Outlook predicts weak growth in 2010 and a consecutive recovery until 2014 when the economic activity is expected to increase by 3.5 percent. However, the economic growth in Eastern tigers is expected to go steadily beyond 4 percent by 2012. By 2012-2014, Estonia's economic growth is expected to set up between 4 and 4.5 percent. Nonetheless, Slovakia, which smoothly matured in macroeconomic stability by entering the EMU in 2008, is set to expand 5.2 percent in 2011 and experience moderate growth ranging between 4 and 4.5 percent until 2014. Even a minor difference in economic growth has a significant long-term effect.

If Estonia and Slovakia steadily experienced 4.5 percent economic growth rate, it would take 16 years to double its GDP per capita. On the other hand, if Slovenia steadily experienced 3.5 percent economic growth rate, its GDP per capita would double in about 21 years. In my workshop on real convergence, I estimated that Estonia and Slovakia shall catch-up with Slovenian level of the GDP in about 12 to 16 years. In 1991, the catch-up gap between Slovenia and Estonia was between 45 and 50 years respectively.

Thus, without bold and strong economic reforms, the future of Slovenia shall be nothing more than a story of a slowly-growing and gradually stagnating economy with close and unfortunate similarities to Italy and France rather than to Singapore or Australia.

SLOVENIAN ECONOMY: 2009 FORECAST

UMAR has issued the latest edition of Slovenian Economic Mirror (link).

SLOVENIA'S ECONOMIC OUTLOOK IN 2009

As a candidate country, Slovenia has been under a detailed observation by the OECD, particulary in areas regarding macroeconomic outlook such as the stability of public finance, fiscal prudence and growth prospects in the short, medium and the long run. Recently, OECD published a preliminary edition of Slovenia's economic outlook in 2009 (link). As expected by estimates and short-term projections, output growth in 2009 will narrowly decline from this year's 4,8 percent to 2,1 percent. A detailed decomposition of growth contributions can be seen here.

Aside from curious structural analysis of the Slovene economy, this year has been accompanied by a turn in the election with center-left government being in charge of forming new coalition. Expectedly, the set of economic policies by the Ministry of Finance is fashioned in the light of this year's financial crisis and a lot of media attention has been devoted to the recovery from the financial crisis.

This year's financial crisis has affected the Slovene stock market. The annual return from SBITOP, Slovene blue-chip index, is -63,12 percent. The rate of return from SBI20, Slovene main stock market, hit -64,36 percent. The collapse of Lehman Brothers where the banking sector has put portfolio investment and mostly the stock market slump in the U.S, Asia and Europe has affected the Slovene economy respectively. Nonetheless, rachitic and inherent problems of the Slovene stock market are not a result of an integration with world capital markets but a harsh consequence of the prevailing insider trading and relative underdeveloped of Slovenia's capital market. The political opposition to the privatization of NKBM, Slovenia's second largest bank, resulted in a rapid decline in the rate of return of NKBM. From January to December, the share of NBKM yielded -73,48 percent respectively. While the correlation between annual yield trends for each enlisted share is very high for the entire SBI20 and SBITOP, the main structural weakness of the Slovene stock market is that stock prices have been heavily overrated as measured by the P/E ratio (link), reflecting the asymmetry of insider information with respect to the evaluation of share prices.

Macroeconomic outlook in 2009 is less favorable due to external shocks that would curb output activity and consequently restrain investment as well. The slowing of investment activity in construction sector, which contributed 1,7 percentage points to output growth in 2007, may curb output growth from medium-term trend line. While decreasing commodity prices boosted deflationary pressures in Q3, inflationary outlook, given ECB's accomodative monetary policy, will crucially depend on the nature of fiscal policy. A decrease in government spending or at least a neutral stance of fiscal policy is essential to the containment of inflationary pressures. Nonetheless, it is crucial to neutralize wage pressures that could boost the inflationary pressures and hinder macroeconomic stability.

INCOME TAX RATES ARE FALLING, BUT NOT IN SLOVENIA

The newest study by the KPMG surveyed tax rates on individual income around the world (link). The study finds that average top rate on individual income is less than 29 percent. In Slovenia, it is 41 percent (link).

SLOVENIA: ELECTION AND THE ECONOMY

In Sunday, voters in my native Slovenia elected left-leaning political party that will presumably hold the majority in the national parliament, given favorable majority conditions for left-leaning political parties as well as the distribution of votes and preferences of political agents. Political analysts and comments have said that Slovenian voters now turned to the left. Aside from political populism of welfare state, it is time for a brief economic view on the future of Slovenian economy and consequences that left-leaning economic policy may induce.

Some Facts about Growth

In 2007 and 2008, the output of Slovenian economy grew by historically high rates, averaging around 6 percent. Economists have different views and analytical opinion what pushed growth onto such high rate. One group of economists believe that output increase is a consequence of demand boost through government spending on infrastructure that boosted economic growth, bringing demand-pull inflation as a consequence while another group of economists believe that Slovenia's economic growth is a result of higher investment rates, favorable global economic conditions such as lowering interest rate and tax cuts. After reviewing the data and forecasting assumptions, I analytically believe that the phenomena of economic growth in recent years in Slovenia has mainly been the outcome of robust investment, reductions in marginal tax rates on labor and capital, and low interest rate. However, given the state of low interest rate, capital deepening is not a key to aggregate productivity growth. What Slovenian economy experieneced was surging investment and small supply-side tax cuts that boosted output growth. In the long run, the growth of productivity is essential to economic growth. Without it, the output growth would slowly diminish in relative terms since a continious lowering of interest rate would lead to deflation trap such as experienced by Japan in 1990s. As first, I would like to refer to the pioneering work of professor Moses Abramovitz on economic growth and output trends (here, here and here). Professor found out that there are huge growth residuals in the measurement of economic growth. For example, when the emergence of new economy propelled innovation, the latter was perceived as an exogenous shock, leaving a huge part of economic growth unexplained. While the static measurement of growth was an empirical practice as long as measuring samples of output growth were based on simplified input assumptions, dynamic advancement of innovation into production, at first, seemed as a measure that is decreasing productivity growth. However, productivity paradox revealed that assumptions in the measurement of economic growth are not a static experiment but rather an experiment that needed empirical renewal. Today, we measure economic growth through endogenous growth model where engines of growth do not come from the "outside" (exogenously) but from the "inside" (endogenously). An advantage of the endogenous model of growth is that, in general, there are not many residuals since shocks are already entailed into the model of growth. However, economic policy can significantly affect the economic performance over the future horizon.

The Greed of Political Agents

In the political market, political parties are utility-maximizing agents that seek anticipated rents through time and power they aim to achieve in the political arena. Therefore, their existence depends entirely on the distribution of economically absurd promises to different interest groups and stakeholders. In Slovenia's pre-election period, political parties delivered countless promises about the prospects of economic development, inflation and other economic issues. If there's a widespread virus of economic illiteracy, then the ideas such as "inflation is a fiscal phenomena" and "government is to be blamed for poverty" can really stick to the conventional wisdom.

Economic Scoreboard

In the fiscal year 2006-2007, the Ministry of Finance launched the first tax reform in the history of independent Slovenia. Top tax rate on personal income was reduced from 50 percent to 41 percent. Also, the entire tax code was gradually reduced from 5 tax brackets to 3 tax brackets with progressive income tax structure - 16 percent, 27 percent and 41 percent. Although tax burden remained high, consuming approximately 47 percent of the GDP, there was an intial supply-side effect on jobs, investment and tax revenue that reached historic highs after tax reductions were imposed. Also, budget deficit (in percent of the GDP) has been reduced and public spending (in GDP's share) reduced as well. Some economists blame tax reductions for poverty. In Slovenia, there is a wrong perception of poverty. The latter cannot be defined by confusing income and net wealth. Using Gini coefficients, the income inequality in Slovenia is among the lowest in the EU, just behind Sweden and Denmark. Also, using Eurostat data (here) as an analytical source, the risk of poverty in Slovenia is among the lowest in the world. Also, Slovenians owe the highest share of owned tangible households in the world. Thus, the rate of poverty in Slovenia is approximately 3 percent of the individuals above the age of 15. In the last four years, the rate of economic growth reached historic highs. Even though Slovenia is a transition economy, output growth throughout transition period was among the lowest in Eastern Europe. However, in the last four years, output growth exceeded 5 percent; the most rapid economic expansion in the economic history of independent Slovenia. Unemployment shrank sharply with its natural rate averaging 4 percent. Although "higher wages" are a popular manifest nowdays, it must be recognized that, in the long run, wages and productivity correlate. In the short run, it is evident that wage growth is behind the productivity growth. Recently published data by the Eurostat have shown that Slovenian economy has not completed the convergence of productivity relative to EU27. Today's level of real labor productivity in Slovenia is 84 percent of the EU27 level, and between 60 and 70 percent of the EU15. Estonia is the regional leader in productivity convergence from 1997-2008, while Slovenia is a regional laggard. From 1997 to 2008, the overall productivity improved by 12,5 index points. For example, in 1997, the relative level of real productivity in Estonia was 38,7 percent of the EU's. In 2008, today's level of real productivity in Estonia compared to the EU is 65,4 percent. Not surprisingly, there is an obvious empirical relationship between bargining power of the unions and slow productivity growth since economies with higher bargaining power of the unions tend to have lower productivity growth. Social democrats, the winners of the election, pledged to raise taxes on productive behavior. In that case, the growth of productivity would reduce to at least 2,5 percent in the medium run. In that case, Estonia's standard of living would catch-up Slovenia's standard of living in 13-14 years, assuming Estonia's 4,5 percent average productivity growth over the medium term. Unfamously, Slovenia is known for the highest rate of inflation in the EMU. Neither the introduction of euro, neither "fiscal impulse" are the flames of inflation which is (by the way), monetary phenomena True, lower interest rate in previous periods by the ECB may have boosted output activity and, at the same time, boosted the level of prices but, in retrospect, high rate of inflation is a consequence of rigid market structure that spills supply shocks into higher prices either because of oligopolistic market structure that imposes mark-ups on input prices, spilling it into consumer prices.

Looking to the Future

After the political turmoil, it is likely that left-leaning political parties will continue the statist course of economic policy with high tax burden in the share of the GDP, hostility towards financial markets (with enormously high tax rate on derivates) and foreign direct investment, postponing privatization with political management and meddling of inefficient state-owned companies. Tax rates will likely remain the highest in the region and Slovenia will, after Hungary and Croatia, remain the only country without flat-rated income tax. As in previous periods, there is little prospect for labor market deregulation that severely hampers productivity growth. In the long run, productivity is everything. After decades of market socialism, Slovenia's unique gradualist approach to economic reform, there is still much to be reformed immediately. Without tax cuts, market liberalization, reduced public spending, the economic growth, and consequently, the standard of living, would decline. Economic theory and practice teach us that there's no better welfare state than high economic growth, enabled by economic and individual freedom.

Rok SPRUK is an economist.

Copyright 2008 by Rok SPRUK

ECONOMICS AND THE RULE OF LAW

Last week, The Economist posted an article (link) describing the relationship between economics and the rule of law. Until recently, the rule of law has been regarded as a matter of political and moral philosophy while neoclassical economists paid little or no attention to the rule of law in the course of economic analysis. Thanks to the contributors of Austrian school of economic thought and institutional economists, the rule of law was shown as an influential motherhood in economic development. Douglass C. North, a distinguished recipient of the Nobel prize in economics back in 1993, demonstrated the significance of the rule of law in his book "Institutions, Institutional Change and Economic Performance" where he wrote that the inability of societies to develop low-cost effective institutions being able to reduce transaction costs is the very reason of economic stagnation in both, historical and current perspective.

Seriously, is there a thing such as market failure?

In the course of economic thought, the rule of law emerged as an issue together with the collapse of the socialist economies of the Eastern block. After the fall of the Soviet empire, Eastern Europe had become a laboratory of testing economic macro and micro theories. Nevertheless, many curious conclusions were made. Among them, the rule of law and the ability of institutional flexibility were recognized as a driving vehicle in the process of economic growth and development. The essence of the rule of law could hardly be defined from a utilitarian perspective. In fact, former communist countries grew tremendously after the ideas of Karl Marx and Vladimir I. Lenin were put into practice. The industrial production and overall output grew several-fold but in the end, the economic growth in the socialist world failed because market incentives to work, save and invest were a deadlight line and the economies from the former socialistic empire were likely to be a balloon, virtually inflated by illusion waiting to explode.

Learning from Hayek and Locke

In economics, the idea of the rule of law was initiated by two distinguished economists. In his book, The Constitution of Liberty, Friedrich August von Hayek wrote that the aim of the rule of law is to set a basic framework of general rules perceived without coercive action. Simply, the more specific the law becomes, higher the magnitude of coercion. In 1690, enlightenment philosopher John Locke captured the essence of the rule in a brilliant sentence: "Wherever law ends, tyranny begins."

Current economic issues confirm that Hayek and Locke were right. When Asian crisis (1997-1998) deflated the expectations of the right policies, the essence of the rule of became obvious. Without a low-cost institutional setting of policymaking based on the rules rather than discretionary action, no macroeconomic reasoning (whether it is intuitive or analytical) may give desirable results.

Effort in the short run, 300 percent dividend in the long run

The first lesson I met when I opened my first economics textbook was that resources are scarce and therefore the optimal allocation of resources together with a given budget constraint is the precise mechanism that solves the basic economic problem displaying the limits of allocation for particular desires. However, it seems that modern postulates of political reasoning seem to neglect the first and very basic principle of economics. Thus, without a high-quality governance and the rule of law, the great divide between different countries is about to start. Economists Daniel Kaufmann and Aart Kray published a challenging working paper called "Growth without Governance" (link). What they showed is a 300 percent dividend, meaning that in the long run, country's income per head rises by about 300 percent, if its governance is improved by one standard deviation point.

Discretion returns discretion

The indices of the unruly law are the object of discretion settled deeply into the institutional framework. By itself, executing discretion among economic agents is more fatal than obviously perceived. In a more technical economic terminology, discretion leads to suboptimal allocation of scarce resources and into a more rigid institutional framework. Thus, discretion is the first step to the point where the law ends. There has been a lot of discussion about discretion (link) but honestly what discretion really means. Three economists, Vishny, Schleifer and Murphy (link) showed how rent-seeking negatively affects economic growth. The outcome of the institutional chaos when private agents seek anticipated benefits via public means. For example, using Nash Equilibrium, the outcome of the bargaining between two agents depends on the type of strategies. A dominant strategy undertaken by one agent is based on the setting of infinite utility given the information, status and unique preferences derived from the lack of the rule of law.

Rent-seeking and infinite demand for private wants by public means

In a rent-seeking model, the demand for public goods in mostly infinite while the supply is limited as shown by a fixed supply curve in a given space and time. The infinite demand is derived from incentives and preferences of the interest groups targeting the maximization of benefits at any price, given the monopoly status that enables the control and access to information needed to bargain a desirable slice. The comparative difference between market outcome and bargaining outcome is the rent, and the interest groups hindering the quality of the rule tend to change their behavioral responses to maximize the differential between market rate and bargaining outcome.

The long run consequences of the lack of the rule of law, meaning rigid and unchangeable institutions, are lower economic growth and structural defects such as corruption and rent-seeking incentives to abuse the rule of law and attain the outcome unavailable in the market with an unchanged productivity performance.

There is no such thing as growth without economic freedom

The question is why economic growth soared in places without changeable institutions and quality governance. The answer can partly be explained by the fundamental laws of macroeconomics such as the law of diminishing return or/and catch-up effects. A country Y with low per capita GDP attains higher growth rate than a country X with higher GDP per capita. In the long run, growth differential gradually disappears. The quality of governance and institutions cannot be neglected. The answer to the question why Ireland is richer than Mozambique is that institutional change and non-discretionary rule of law in Ireland enabled an economic performance that resulted in a decade of stunning growth and an unparalleled prosperity.

Paying the price of the status-quo

As the first former communist economy which recently adopted Euro as a single currency, Slovenia is often praised for its achievements. One side of the coin is certainly true but the other side of the coin shows a completely different picture. In 1990, the GDP per capita of Slovenia and Ireland was merely the same, measured in USD and adjusted for inflation. Today, Ireland's GDP per capita is 1,77 times (PPP) and 2,66 times (in current USD) higher than Slovenia's GDP per capita. Today, it would take between 50 and 60 years for Slovenia to "catch-up" Ireland's GDP per capita, adjusting it for inflation. Surely, Irish economy enjoyed the benefits of stable and non-discretionary institutions that helped sustained an incredible economic performance. On the other side, Slovenia's envious economic performance is mostly a continuous leap with little change in innovation and productivity performance. In fact, according to Eurostat, Slovenia is among those transition economies that have sustained a slow-motion productivity growth compared to Baltic tigers. Gimmick and backbone perspectives and shadows wavering over Slovenia's economy will sooner or later deliver a menu of price - a price of the absence of the rule of law and the price of the status quo. Period.

Rok SPRUK is an economist.

Copyright 2008 by Rok SPRUK

WHEN GOVERNMENT ANNOUNCES A STRIKE

In Slovenia, judicial branch of government recently announced a strike, claiming that judges are underpaid and demanding an initial wage increase. The first question to be asked is against whom the judicial branch of government is really demanding a strike? The announcement of the strike is a mark revealing the prevailing corruption in the judicial system, taking place throughtout the process of political transition from socialist system to the system based on market democracy. In Slovenia, generally speaking, private property rights are weakly protected, reflecting slow procedural operations, internal inefficiencies and signs of corruption in Slovenia's judicial system.

Tomaž recently published a beautiful post discussing judicial claims over wage increases:

"The announcement of the strike on behalf of Slovenian Judicial Association is an unusual step, knowing that not all Slovenian judges are not the members of the Slovenian Judicial Association. Even local fireworkers cannot announce a general strike of all fireworkers in Slovenia. That's why, Slovenian Judicial Association does not and cannot have a legitimate right to announce a strike on behalf of all Slovenian judges.

The use of means regarding general strike opens the essential question: against whom shall Slovenian judges announce a strike? From a historical perspective, "strike" has emerged from the individual rather than collective initiative of employees against the employer. By definition, trade unions are workers' associations. Later in the course of time, trade unions launched widespread initiatives as a form of political pressure against government authority as Solidarity did it in Poland in late 1980s."

Source: Tomaž Štih, When Government Announces a Strike (and almost realizes it), Libertarec, January 22, 2008 (link)

THE VOICE OF CLASSICAL LIBERALISM

There is an important incoming change in the Slovenian political market. After almost two decades of political parties whose ideology has been based on collectivistic values, economic nationalism, market protectionism, government intervention and high taxes, a fresh new political party called Liberalci (Liberals) is arising. Party's program is based on the principles of limited government, low taxes and the rule of law. The party has already launch an ambitious and productive policy agenda which can be read here. The basis of the program are the ideas of classical liberalism such as individual liberty, economic and political freedom. The interview with Tomaž Štih, the founder of the party, can be read here and here. Mag, Slovenia's weekly politico-economic magazine has also written an interactive article about Slovenia's first classical liberal party. The article can be read here.

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

PRIVATIZATION OF STATE ENTERPRISES: THE CASE OF SLOVENIA

Dr. Joze P. Damijan, the professor of economics at Vienna University of Economics and Business Administration, recently wrote an article about the need to accelerate the privatization of state enterprises in Slovenia. The article can be read here and here.

In Slovenia, 65 percent of the GDP is composed of private sector while public sector is extensive, accounting for about 35 percent of the GDP. There is a numerous empirical evidence in favor of privatization. In fact, the allocation of scarce resources is the key argument for privatization. Managers in state enterprises have different interests than private investors. That's why, private enterprises are more risk-taking in particular investment opportunities. Thus, as an empirical matter, private investors usuallly sustain higher rates of return on equity than managers in state companies.

In Slovenia, the government has been controlling the economy by extensive ownership participation in all major enterprises, ranging from insurance companies (Triglav), pharmaceutical industry (Krka), manufacturing sector (Gorenje) to retail industry (Mercator), banking sector (Nova Ljubljanska Banka, NKBM) and even telecommunication sector (Telekom Slovenije, Mobitel).

There is also a proof that sizeable state entrepreneurship reduces growth and distorts capital allocation nevertheless. In China, there is an average estimate that a decrease in state-owned enterprise share of industrial production increases real GDP growth by 1,14 percent (Phillips, Kunrong 2003).

In Slovenia, political and popular attitude toward the privatization is somehow negative. Yet, the privatzation is urgent. Some privatization is already taking place. Unfortunately, it is taking place very slowly and non-transparently. The withdrawl of government ownership of enterprises is essential to sound economic performance and economic liberty nevertheless.

SLOVENIA GOING SLOW ON PRIVATIZATION

Here is a note from Economist on Slovenia:

Slovenia was already economically advanced by regional standards when it gained independence, so that it has experienced slow growth rates relative to other central European economies, and has adopted a more complacent attitude towards privatisation and economic reform... The main economic policy issues include the privatisation process and attempts to improve the business environment. Progress on both is made difficult by the consensus-based nature of policymaking.

Source: Economist, Country Briefings: Slovenia (link)

The empirical argument in favor of privatization is that the allocation of scarce resources is more efficient in private economy than in public sector regardless of the economy's sector. The only argument that could speak against privatization is the establishment of natural monopolies in case if competitive code is not fully enforced. In this case, control over natural monopolies is needed to prevent price speculations that could occur at the expense of consumer welfare.

The quality of Slovenia's business environment is restrained by administrative burden, restrictive labor regulation and high tax burden which disables the creation of productive behavior. The total number of reforms in Slovenia regarding the ease of doing business is zero (link).

The product quality of the country's business environment is, by competitive analysis, as any other market product. Higher the quality supplied (the number of implemented reforms to improve business environment), higher the demand for the product (the number of investors going for business in Slovenia and the growth of start-ups, spin-offs, and wanna-be's) and higher the reputation of the country as an investment location.

STREET SOCIALISM IS THE LAST SHELTER OF SCOUNDREL

Following the headlines of the international media, Slovenia is a fine land consisting of happy people, whose country's nobility is enriched by the fact that Slovenia is the wealthiest post-communist economy which recently entered the European Monetary Union, and a country enjoying the highest GDP per capita and standard of living in the Eastern Europe.

However, the reality is something completely different as I try to demonstrate in the words below.

Being a student is a nice slice of lifetime. I do not pay attention to attending student parties and thus, I rather wisely invest my time into sitting at the library and studying the economic theory, policy and philosophy besides regular study courses. The fact is that the opportunity cost of attending parties is huge and it'd be completely irrational to neglect it or ignore it respectively. For example, Kobe Bryant understands his opportunity cost very well. He can, for instance, spent 2 hours mowing his lawn, having low overall return.

Contrary, he can record a TV commercial, earning $10,000 USD in two hours. His neighbor, Sally, might spent 2 hours working in McDonald's, earning $8 USD. Despite the fact that Kobe might mow the lawn faster than Sally, it'd be rational for Kobe to record a TV commercial while it'd be equally rational for Sally to mow the lawn, because of the opportunity cost.

Economically, my interest as a student is to finish the undergraduate study as soon as possible and get an overall return from the education. The opportunity cost of the education is, of course, my time. But in a broader perspective, higher earnings and human capital value is what shall count as a compensation for investing my time into the education, getting both: better education and better job opportunities.

As an economist, I strongly favor free choice; an ability to choose among the greatest possible set of alternatives in the course of human life. In fact, individual, economic and political liberty and individual responsibility to the fullest possible extent, is what has unlocked creative and talented entrepreneurial and intellectual minds to pursue intuitive and powerful ideas that shaped the economic future.

But I don't understand, why on earth, should the students jump on the streets, wear red suits, head old Soviet flags and shout in favor of the welfare state extensively. Slovenia's student organization, pensioners, public sector employees and trade unions claim that wage increases should be more robust subject to Slovenia's sound current economic shape and, on Saturday morning, they will march on the streets of Ljubljana and promote the spellings of socialism, social security and generous welfare services respectively. Slovenia's student organization says the following:

"An accessible education without scholarships for all, higher pensions and greater social justice. These are the ideas that will make everyone better off."

Over at the faculty field, I noticed a socialistic parole, saying: "Factories in the hands of workers, universities in the hands of the students!" added with Soviet-styled propaganda and typical communist star. This situation rather reminds on a retarded Soviet satelite grunged by Leninism and Marx's diallectical materialism. The origins of socialistic mentality in Slovenia are strong roots of collectivism. In this post, I explain why student protests against pro-growth tax and economic policy, school choice and competition in higher education, reform of the budget-funded health care system and social security reform are based on the false assumptions, myths and hostility against individual, economic and political liberty.

1. Population crisis in Slovenia is estimated to hit negative numbers. Aggregate labor supply is falling respectively and the number of retired persons is growing significantly. In Slovenia, when a person retired, the main slice his pension in financed through 1st pillar of pension fund which is funded directly through taxes on labor supply. The impact is clear: tax burden on labor supply is rising, public debt is growing respectively and fiscal outlays are expanded every year.

Consider the gross cost of an educated and intelligent worker in Slovenia, which an employer has to bear. Assume that monthly salary of the worker equals $3500 EUR in gross terms. The contribution rate to the retirement fund is 15,5 percent. Basic health care insurance deducts additional 6,36 percent. Personal income tax rates are composed into three brackets; 16 percent for the lowest quantile, 33 percent for the middle-income earners and 41 percent for the workers in high-income groups.

Obligated voluntary health insurance contribution rate is small compared to basic coverage rate of contribution, but it deducts the disposable income respectively. Additionally, employers have to pay the payroll tax and enhance the worker's income by compensating the costs of food and transport. In addition, an employer in Slovenia has to slice a contribution share to health care, social security and pension fund, at the expense of worker's productivity. Now, calculate the disposable income of the employee and see the tax wedge, squeezing his productivity after the hours he spends on the market.

2. Moderate tax cuts by the center-right government stimulated the growth of incomes by a narrow rate. Modest cuts in the labor taxation showed that tax cuts are self-financing, the unmistakeable notion of the Laffer Curve. Recently, the growth of economic activity in Slovenia reached historic highs. In 2007, the growth is estimated to reach 5,6 percent, which is quite uncompetitive compared to Eastern European economies. In 2006, Estonian economy grew by 7,9 percent, Latvia accounted 10 percent rate of output growth, Slovakia recently announced the data, revealing 9 percent annual growth rate.

By 2012, Slovenia's economic growth is estimated to diminish straight-forward to 3,6 percent respectively, reflecting weak structural advancement, age-dependency pressures and rapid increase in retirement activity. In 2006, the rate of inflation sparked up primarily due to higher food prices and intensive demand for food in Asian high-growing economies. Economically, inflation is a monetary phenomena arising from too much money, chasing too few goods. In a simple equilibrium, the result is the increase in overall price level. By January 2007, Slovenia entered the European Monetary Union, and after fixing the monetary emissions, the growth of money supply calmed down which normalized the inflation rate.

Subject to deteriorating exchange rate regime and periodically stimulated high inflation in the past, it will take time for Slovenian economy to adjust to new stream of monetary policy whereby the money supply is determined through interest rate setup by the ECB.

3. There is no such thing as free education. In fact, somebody has to pay the equipment, rent and maintain the facilities, lecture rooms, provide the electricity and heating. In addition, somebody has to hire and pay the academic services. Somebody has to pay and provide computers, internet access and modern means of study. Saying that education is free is like claiming that you can go into the mall and take away some furniture without payment. There is a dozen of proofs that private sector education is competitive in terms of quality of the future graduates.

The best and most respected universities in the world are private ones. Eight Nobel-winning economists have come from Chicago University which is funded by private means as well as Stanford University. Investment in education provides the best interest in the future. The time you give up to consume, is the cost you have to bear to have greater returns and personal welfare in the future.

There is no such thing as free lunch, and the education has never been a free lunch. Scholarships, by empirical proof, improve the standards of education and provide opportunities for thousands of individuals to unlock knowledge potentials and empower the intuitive mind whether it be in entrepreneurship, design, economics, medicine, mathematics and everywhere else.

4. The essential to understanding complex phenomena in society is the economic literacy and education. Thus, Slovenes should know that despite the same length of working time as Austrian or German workers, the latter earn more because of higher productivity and technological progress which stimulates the productivity through effective individual management of creativity and knowledge. In addition, Slovenia is, as shown above, one of the most taxed countries in the world (link), thus giving investors a sign of avoidance as an investment location. Empirically and practically, labor supply is highly sensitive to tax rates, meaning that the labor supply is elastic, ceteris paribus.

It means, that the labor supply strongly responds to the marginal changes in taxation of income. As a result of higher taxes, gross labor cost in Slovenia is huge, discouraging job formation and denying the opportunities to thousands of intellectual and entrepreneurial minds to show their skills and talent. I wonder whether trade unions and its anti-growth intellectual leaders will bear full responsibility for the actions they presume as socially just. To say it again, social justice is a mirage and a trojan horse riddled by the totalitarian governments and supported by the individuals who deny economic and personal liberty to others. Those who deny the enforcement of economic and personal liberty as a property right to others, neither deserve it for themselves.

The demands of trade union such as full employment, high taxes on productive behavior, high wages, expanded income and profit redistribution, extensive welfare and social security services, would propel the stagnation of growth as well as the productivity potentials which is the main engine of growth in standard of living. Claims of egalitarian pursuit of redistribution, material and income equality, under which trade unions in Slovenia delegate the course of living order, can only be met under governments with totalitarian powers. Extensive unionism and its influence on structural and economic policy is perhaps the most powerful evidence that Slovenia is de facto the most socialist country in Europe.

5. At last, Slovenia's economic policy in the past 15 years is the most notable proof about the negative impacts of gradualism entailed into the course of public policy. Slovenia kept persistently the highest inflation among advanced countries in Eastern Europe. When the left-wing government took over the chairmanship in government, wages in public sector trimmed up enormously by 40 percent, creating an additional source of inflation pressures. The deadweight loss from economic depression was vast. Meanwhile, Slovenia's international competitors grew rapidly and thus a development was geared-up. In addition, the policy of early retirement enabled the formal retirement before the age of 50. In just one year, between 1992 and 1993, the number of retirees rolled-up by more than 100 percent.

Over the years, Slovenia's pension system, in terms of outlays, has been financed through budget and the first pillar of retirement insurance is estimated to be depleted in the medium run consequently because of the abovementioned reasons including early and beneficial retirement, high pensions and sky-rocketing continual spirals of wage increases in the public sector, adding a burden to high government spending.

6. In 1950, in terms of current prices, Slovenia's real GDP per capita was higher than Austria's which suffered war losses. From 1960 onwards, Austria's prosperity increased tremendously after Austrian early reformist government and its minister of finance Reinhard Kamitz adopted low taxes, imposed deregulation and liberalized trade and prices, while Slovenia's GDP growth started to trick towards relative stagnation. When Austria's technological development accelerated productivity growth, its standard of living grew tremendously, at the fastest pace in Western Europe.

When Austria enjoyed the fruits of market economy and remarkable output growth rate, Slovenian economy was mischiefed by socialist self-management which demolished the efficiency of entrepreneurial investment by wrongful decisions embraced by politicians, political entrepreneurs, workers and union leaders, who knew neither risk nor ambitious agenda, as there was no private means of production under socialism.

Finally, when Slovenia gained independence from communism, Austria's economy advanced the output growth while "the wealthiest ex-communist country" slid into depression while its central bank tacitly led the policy of high inflation through deteriorating exchange rate. Thus, the hourly output per average Austrian worker is higher relative to the output of Slovenia's worker per hour, because of higher productivity, greater innovative and entrepreurial capacity, and succinctly utilized gains from hours spent in the market.

7. Tomorrow, the streets in Ljubljana will shout and scream again, reflecting the misery of sub-Alpine socialism, which has always known nothing else but envy, misery, lies and deception. I will rather spend my time studying and reading Friedrich August von Hayek's The Constitution of Liberty, Greg Mankiw's Principles of Economics, Imre Lakatos's Proofs and Refutations, Karl Popper's Logic of the Scientific Discovery, James Buchanan's Demand and Supply for Public Goods, Kenneth J. Arrow's Social Choice and Individual Values and Wilhelm Roepke's Economics of Free Society.

Rok SPRUK is an economist

Copyright 2007 by Rok SPRUK

DEMOCRACY IN SLOVENIA - A GRAVEYARD SLUT

by Rado PEZDIR

In the fall filled with two national referendas regarding whether Triglav, Slovenia's largest government-owned insurance company should be privatized, and the epilogue of collective bargaining between trade unions and the federation of employers which reminds us on the last sequel of South-American soap-opera, someone could think that Slovenia is a climax of world democracy. It could be thought that this idyllic sub-Alpine landscape is a paradise dreamed by the premise of enlightenment thinkers; a paradise where the wisdom of the citizens tactically paves the road on which society's development takes its own walk. Unfortunately, the reality is completely different and it can be admitted that all sparks of hope for democratization of post-communist society are nothing else but a nostalgic stupidity. In Slovenia, for a long time, the individual does not vote for anything in the elections.

ELECTORAL JUNK

Let's have a look on presidential elections. I think that everyone who wants to explain why we need this junk will face big troubles. Why?

First, in Slovenia, the president has no authorized means of decision-making which would justify the existence of this particular instance. Of course, I assume that institutions are created to have legitimate authorization and not vice-versa.

Second, Slovenia's chaotic institution requires the intersection of legitimacies of democratic institutions, and consequently, there is an inherent probability of institutional conflicts. Mostly because Slovenian policymakers do not actually know which particular legitimacies are ought to be authorized to justify the existence of the institute of the president.

What this means in practical terms, is clearly demonstrated by the latest selection of future governor of the Bank of Slovenia; a situation in which prime minister and the president had an electoral mandate to appoint the governor. At the end, the technical dilemma turned out into an insensible political battle.

Third, some claim that the presidential function is necessary due to its role in representing Slovenia abroad in a remarkable flash. The truth is that the presidential function distorts the other branch of government, the Ministry of Finance, and thus it creates a splash of institutional conflicts. Just think of president Drnovsek's inspirations to solve the Darfur crisis. Was it necessary? At last, if Slovenians want a representative abroad, then gather some money, hire the little boy who knows how to recite the sonnets of William Shakespeare in thirty languages, lock him into the cage, and show him into the international arena. There is no need to waste taxpayers' money.

And at last, a large majority of Slovenians is evinced that the presidential function is necessary because of the need to have a discretionary moral authority such as Plato, Indian gurus, Vatican's cardinal or anti-globalist Joschka Fischer, to morally regulate our lives. Are they serious? Do they suggest voting the highest moral highlight? Excuse me, but this particular construct is a replica of a theocratic state where Ayatollahs are elected and then they submit their opinion on immoral youth and inadequacy of loud music. To exculpate the existence of particular institution with the assistance of an absolute morality is, in a normal democratic state, nothing else but an unrestrained absurdity. In effect, the presidential function is unnecessary and that's why, let's avoid further institutional crash of the splash. My colleague Mićo Mrkaić has thoroughly abstracted the irrelevance of presidential elections in Slovenia: ignorant people need an idol to command from emperor's rooms, the way it was conducted by Kaiser Franz, Maria Theresa, and Josip Broz.

NON-ELECTIONS

The second redundancy is the elections in the State Council this fall. State Council is the remaining creature of fascistic corporate system. Let's summarize how these elections go through. At the end of the mandate, interest groups get together and select a dedicated person who is then authorized to delegate our lives from Ljubljana. Then, the illuminant is sitting in the chamber of State Council by making decisions regarding our everyday lives; without being authorized to do so. How democratically. Suppose that a group of voters proposes a law bill to the parliament and democratically elected parliament passes the bill by a slight margin of votes. In a normal country, this would mean the end of the process, but in Slovenia, the story is going forward. If any of numerous interest groups with representatives in the State Council is not likely to embrace the law bill, it can use the veto and stop the entire process. And then, we're the one who should deal with elections and democratic institutions. The madness such as the undemocratically established body has shown its worth in the initiative of the State Council, suggesting the referendum whether Triglav, the largest asset-holding insurance company in Slovenia, should be privatized or not. Funny; the answer tp the technical question ought to be solved by democratically elected government is proposed by the unelected instance. We already decided to transmit the mandate to solve such a situation to the government, haven't we? I personally think that the State Council exists because a fraction of voters cannot embrace the fact that they're responsible for their lives on their own, while a share of voters would like to regulate the lives of other citizens through the power exercised by the interest groups represented in the fascist-styled State Council.

INTEREST GROUPS CONTROL THE ENTIRE COUNTRY

The fact that interest groups have their own debate luncheons at the expense of taxpayers' money and do whatever they want at any time, is simply a blockade of decisions approved by democratically elected institutions. And even more: it is a blockade that disables the functioning of a democratic system. An ability that interest groups without the approval of taxpayers, are dealing about the way of living that citizens will simply have to embrace and live with it, is coming from the constitutionally approved status of the State Council and collective bargaining. A procedure, in which workers' monthly salary is not determined by his output and productivity, but by the bargaining decisions approved by trade unions; the latter call social justice. As a side-effect, entrepreneurs must give up a fraction of profit due to decisions passed by non-elected institutions, namely trade unions. You're not wrong if you think that such process is a restitution of the situation once common in the Soviet Union. In Soviet Union, wages and salaries had no feedback measures to the output and labor productivity, but instead, salaries were determined collectively subject to central planning. As a matter of fact, what you produce in Slovenia has no effect on your monthly earning but the productivity of labor supply is restricted by the means of collective decisions of trade unions. In addition, there is always no study on how artificially determined salaries affect the economic performance of Slovenian economy. Instead, trade union leaders propagate the ideas that entrepreneurs should give up their own profit. By its means of collective power, trade unions aggressively aim to regulate and flip into the private property of entrepreneurs. It is interesting why trade unions do not invest in particular companies and then give up their profit for the benefit of the labor force. Whether you are asking, when you authorized trade unions to allocate your resources and boost income redistribution, your questioning has no effect since State Council and trade unions collectively make decisions about your lives without a check-up of their proposals in the general elections.

A DEMOCRACY OF WAR MASSACRES

In addition, there are two non-elected representatives in Slovenian parliament approved on the basis of their nationality. What a democracy - a democracy on the basis of Slovenian shame, such as the genocide of Italian, German and Jewish community. Thus, Slovenians have collectively admitted not to aggravate if they have bloody conscience about their own past. Instead, for them it is admirable to have a handicapped democracy which places two non-elected representatives of minorities in the national parliament. If you perceive that as a hang of overdoing, think about suspicious role of those two representatives several times respectively. And if everyone is treated equally, where are the Roma, Serbian and German representatives? Shall we rather dissolve the entire parliament and put in suitable representatives? In case if anyone doesn't know - parliament is a democratic institution whose members are elected on the basis of individual preferences and not on the basis of individual ethical origin. To protect the human rights, there is a judicial system that defends individuals against violations of human rights of all the citizens, including ethnic minorities. It is simply not a seat in the parliament which protects the rights of the minorities.

So if you attend the elections, the impact of your vote will be the same as in the period of socialism - none. That is because of institutional chaos based on Slovenia's constitution. From this point of view, presidential elections are nothing else but a typical junk and wasting of taxpayer's money. In sum, democracy in Slovenia is like a a graveyard slut (also a song sung by Norwegian black-metal band Darkthrone) - it can be bought cheaply by anyone whereas no one cares whether it works or not.

Rado PEZDIR is an economist.

© Copyright 2007 by Rado Pezdir

*An article was translated in English by Rok SPRUK, an economist and the owner of the web log Capitalism & Freedom

SLOVENIA, SOCIALIST REPUBLIC INC.

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.

ECONOMIST'S VIEW ON SLOVENIA'S PRESIDENTIAL ELECTION

I'm not used to write posts associated with politics and parliamentary or presidential election. Despite the notion of politics as an untouchable prism, it is noteworthy that political market is a contemporary chapter of modern economic analysis. James Buchanan, the Nobel-winning economist, pioneered the public choice and constitutional economics and demonstrated how effective the application of economic analysis to the state of political market can be. In fact, the political strategies seen and observed everyday behave as normally as a typical market governed by the rule of public choice. When the aspects of game theory are added and variable multiple choice attached, the observation of the political market becomes highly interactive.

When functionally illiterate vote the chairmanship

When a classical liberal economist observes the public choice in Slovenia, he or she does not actually know where the magnitude of political compass is situated. Mischiefed by the ideology of national interest, staunch Keynesian economic perspective and the mixture of conservative and statist views regarding the issues of personal and economic liberty, Slovenian politics is a valuable tool when it comes to populist assertions delivered to the population which is 85 percent functionally illiterate (see: OECD, Literacy in the Information Age). The dictionary of pro-growth policy proposals is replaced by the revealed political preferences against the completion of privatization, the enforcement of competitive law and the reform of the old Gaulist-styled government intervention and populism added-up with the preaching of communist revolution and slogans of Karl Marx notably assessed by trade unions and the derivates of old-socialist ideology.

Slovenia's economic record - losing growth momentums

Slovenia emerged as an independent sovereign country in 1991 when it nominally diverged from a unique system of socialist self-management and stepped on the path of a presumable transformation to market economy, political democracy and the rule of law. Before the shift towards the policies of state intervention and socialist mismanagement, Slovenia had a higher income per capita than neighboring Austria adjusted for inflation and international price comparison. Before the communist revolution swept the country, compared to Greece, Slovenia had been a powerhouse of wealth with a far greater income per capita and advanced output performance. In 1945, the tool of central planning mainstreamed the economic policy. The industrial assets had been confiscated and the institute of private property abolished. The confiscation of property negatively affected all the wealth which markets had created. The redistribution of wealth and income accelerated at the full gas. The sum of created wealth in the next period had been low and the absence of market entrepreneurship, replaced by the political decisions about investment and allocation of resources in the real sector, resulted in the weakly conducted investment of the real economy. The overall coefficient of investment had been high in average, depending on the separate sectors of the economy. Meanwhile, Spain and Greece had merely the same GDP per capita with much less investment inputs and capital formation as a share of the GDP. If the coefficient of investment efficiency had been as high as in Spain or Greece, than Slovenia's GDP would increase 2,5 times over the period of 25 years. Low score on overall efficiency of investment prolonged the economic crisis and brought the upward inflationary pressures after serial currency devaluation. The stocks of capital formation were empty and the industrial competitiveness was low as much as the export performance of Slovenian enterprises. In 1990, 4 years after the start of continued output decline subject to a spiral of hyperinflationary pressures, Slovenia enjoyed the highest standard of living and the highest GDP per capita in the socialist world. However, from 1986 to 1992, Slovenia accounted a significant negative GDP growth converted into overall output loss. The macroeconomic framework in a newborn state had been far away from growth-friendly. The agony of high public spending, high tax burden and structural backlash worsened Slovenia's relative competitive regional and global position.

When Estonia matures and Slovenia fails

What about Estonia, Slovenia's hot rival and the Eastern European Baltic tiger? Despite the severe economic crisis, Estonia's visionary leader Mart Laar pursued what he learned from Milton and Rose Friedman's Free to Choose. The elimination of tariffs, the reduction of public spending, the monetary reform, structural liberalization and a radical tax reform returned a rapid GDP growth and structural advancement, an incredible metamorphosis from Soviet-styled economy into free-market economic powerhouse. Today, macroeconomic estimates for Slovenia respectively express concerns over the long-term stability of the public finance. The risk, involving the sustainability of the generational accounts, seriously threatens output performance and structural advancement. Today, Slovenia is still recovering from decades of socialist mismanagement. The basic infrastructure such as highway system, is incomplete and the public spending on infrastructure is expanded at the expense of higher public debt in the future.

Risk management and taxes - who cares?

At the same time, Slovenia is one of those countries which are ought to face a significant demographic crisis regarding the sustainability of the public-funded health-care system, pension system and welfare services. The macroeconomic policymakers, however, never considered the course of macroeconomic policy aimed to avoid the structural risk through the establishment of pension funds covering the current expenses of the demographic crossover which could be easily funded through the sale of state-owned assets. Thus, Slovenia generational accounts are funded through punitive taxation of productive behavior such as enormously high employee contribution rates to health-care schemes. It is thus hardly surprising that Slovenia is the most taxed country in the world according to the "take-home" income residual after taxes.

How can a communist president claim to be a democrat?

The intellectual fathers of government failure in during transition to cut taxes and promote foreign direct investment to accelerate enterprise restructuring of the lagging backlashed socialist economy, are the old guards firmly consolidated in the prism of staunch socialist ideology and Orto-Keynesian perspective when it comes to the issues of economic policy. Slovenia's first president, Milan Kucan, had been the president of central committee of the Communist Party. When dr. Ljubo Sirc, classical liberal, economist, the president of CRCE and the Slovenian immigrant living in Edinburgh, ran for a president, Slovenes prefered to vote for an old communist guard Milan Kucan. The attitude of his political presidential chairmanship roared the government intervention in the economy through the political establishment of elitistic corporate oligarchies (Forum 21). An open calls against the privatization of state-owned enterprises, lobbying against the entry of foreign direct investors in Slovenia, the leadership designed through the style of old communist populism, are just a few item describing the agony of communist presidents in post-communist Slovenia.

Let the candidates show their knowledge of economics, maths and statistics

The public choice between the candidates for the president of Slovenia is poor. The promotion of the ideology of the chauvinistic nationalism and socialism is a deadly drift which had been undertaken by the cruelest dictators in the world. Calling for bigger government and thus even more corrupted government through statist ideology is what the headline of presidential candidates proposes. I suggest that presidential candidates pass the mathematical, statistical, logic and economic literacy test and than we'll see who's the most competent presidential candidate in the round.

Sadly, this year's election again demonstrate how deeply rooted is the nationalist and socialist mentality in Slovenian society regarding the attitudes toward open society, free economy and personal liberty. As a voter I'd expect from a president to openly promote the fight against monopolies and cartelized structures, to call for school choice, tax reform, deregulation, the enforcement of competitive law, competitiveness efforts, and especially to act and behave like a statesmen, not a politician.

Slovenia: WASP - Wrecked Archaic Socialist Pond

Unfortunately, Slovenia is still a socialist society and all it can realistically be expected from the future president is populism an further protection of big government. It'd be completely out-of-date to expect a free-market enthusiasm, visionary attitude and ambitiously geared desire for change. In a dysfunctional sub-Alpine cesspoll of lies and deception, where anti-Americanism and the nationalistic sequels governed nearly all walks of society, the president is like a leader of the tribe suffering from shocking historical truths about its genocide leaders who lived through corruption, manipulation and lies over the pond of local self-sighted, envy-inflated, brainwashed community called Slovenia.