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23 July 2012

Slovenia: The Only Successful Case of Economic Transition

It is often taken for granted that transitions from a centrally planned economy to a market economy in Central and Eastern Europe (CEE) have been successful. After all, privatization has been completed, often with higher ratios of non-collective ownership than in Western Europe. Economic output, which dropped radically in the nineties, has bounced back, and the rise in gross domestic product (GDP) in the CEE region has been faster than in Southern Europe, especially with the crisis severely affecting the Mediterranean countries. The macro picture looks promising.

Yet on the practical micro level of ordinary citizens it is not an exaggeration to call economic transition an enormous failure. With the single and gradually diminishing exception of the Czech Republic, the entire region of the former Soviet Bloc is an employment crisis zone. Unemployment in the region is higher than in the European Union as a whole, and astonishingly higher than in the Northwest of Europe. Economic transition based on the inflow of foreign direct investment and multinational enterprises clearly has its limits as far as employment potential is concerned. The same is true of wages. According to Eurostat data, the average wage level of Eastern Europe has hardly converged in relative terms to that of Western Europe, and the difference in absolute numbers has even increased since the beginning of the transition process. While prices across Europe have by and large converged (some products, such as clothes and electronics are actually more expensive in Eastern Europe than in the West), after paying for rent, food and clothing, Western Europeans can now save far more than Eastern Europeans in comparison to what they could twenty years ago. In fact, very few Eastern Europeans are able to save anything at all. While the average Western European earned around 23–43 euros gross per hour in 2010, the average Eastern European made no more than somewhere between three euros in Bulgaria and ten euros in the Czech Republic. The region is stuck in the role of a low value added, low wage manufacturing and assembly periphery of the Western European economy, much like Mexico vis-à-vis the United States. Low wages and scarce employment mean low revenues for the state, a situation worsened by a senseless tax competition race to the bottom. Thus to add injury to hurt, low private living standards are coupled with low public expenditure by incapacitated states. While politicians seem willing to admit that the global economy is about competition for knowledge and skills, without investments into education the longer term chances of the region catching up are growing slimmer and slimmer.

Only one former socialist country seems to stick out of the crowd. In contrast to figures from around the rest of the region, Slovenia has Western European levels of employment, a figure which was even growing prior to the crisis. Gross hourly wages of 14 euros in Slovenia are comparable to Cyprus, higher than wages in Portugal or Malta, and considerably higher than Eastern European wages. GDP growth since transition has been constant, and fiscal stability exemplary. In more ways than one, Slovenia is a model economy.

It is often taken for granted that transitions from a centrally planned economy to a market economy in Central and Eastern Europe (CEE) have been successful. After all, privatization has been completed, often with higher ratios of non-collective ownership than in Western Europe. Economic output, which dropped radically in the nineties, has bounced back, and the rise in gross domestic product (GDP) in the CEE region has been faster than in Southern Europe, especially with the crisis severely affecting the Mediterranean countries. The macro picture looks promising.

Yet on the practical micro level of ordinary citizens it is not an exaggeration to call economic transition an enormous failure. With the single and gradually diminishing exception of the Czech Republic, the entire region of the former Soviet Bloc is an employment crisis zone. Unemployment in the region is higher than in the European Union as a whole, and astonishingly higher than in the Northwest of Europe. Economic transition based on the inflow of foreign direct investment and multinational enterprises clearly has its limits as far as employment potential is concerned. The same is true of wages. According to Eurostat data, the average wage level of Eastern Europe has hardly converged in relative terms to that of Western Europe, and the difference in absolute numbers has even increased since the beginning of the transition process. While prices across Europe have by and large converged (some products, such as clothes and electronics are actually more expensive in Eastern Europe than in the West), after paying for rent, food and clothing, Western Europeans can now save far more than Eastern Europeans in comparison to what they could twenty years ago. In fact, very few Eastern Europeans are able to save anything at all. While the average Western European earned around 23–43 euros gross per hour in 2010, the average Eastern European made no more than somewhere between three euros in Bulgaria and ten euros in the Czech Republic. The region is stuck in the role of a low value added, low wage manufacturing and assembly periphery of the Western European economy, much like Mexico vis-à-vis the United States. Low wages and scarce employment mean low revenues for the state, a situation worsened by a senseless tax competition race to the bottom. Thus to add injury to hurt, low private living standards are coupled with low public expenditure by incapacitated states. While politicians seem willing to admit that the global economy is about competition for knowledge and skills, without investments into education the longer term chances of the region catching up are growing slimmer and slimmer.

Only one former socialist country seems to stick out of the crowd. In contrast to figures from around the rest of the region, Slovenia has Western European levels of employment, a figure which was even growing prior to the crisis. Gross hourly wages of 14 euros in Slovenia are comparable to Cyprus, higher than wages in Portugal or Malta, and considerably higher than Eastern European wages. GDP growth since transition has been constant, and fiscal stability exemplary. In more ways than one, Slovenia is a model economy.

Behind this consistently favourable data there must be an original economic structure. A brief look at economic transition in Slovenia reveals that during the transition years the country chose an economic model that was different from those adopted elsewhere in the region. Most Eastern European countries decided to open up to foreign direct investment after a brief and unsuccessful period of trying to build  their own domestic frameworks  of  capitalism. Their poorly managed firms went bankrupt under the weight of outdated technology, and their banks – who were themselves collapsing under bad debt – could no longer provide them credits which they knew would never be repaid. In many places privatization to incompetent market agents even speeded up these processes. Thus after the watershed year of 1997 the region moved towards what was known as the Hungarian way: privatization to transnational enterprises, especially in the manufacturing, banking, financial, retail and energy sectors.

Only Slovenia held on against the current, keeping most of the economy in Slovenian hands. In fact a sizeable chunk of the economy is still state-held, or is community owned through various funds. Thanks to this economic structure, Slovenian firms have remained independent of the global production chains of multinational corporations. While Eastern Europeans had to cede high value added production phases (product definition, research, development, design, financial services, management, etc.) to parent companies, Slovenians have managed to preserve the entire range of jobs from blue collar to the highest echelons of white collar professions. Slovenian firms are just as export-oriented as the assembly plants of the transnational firms in the East of Europe, but in contrast to other countries in the region the profits stay within Slovenia. The widespread presence of high value added jobs does not only mean higher levels of employment, but also higher average wages, and consequently the multiplier effect of higher demand for lower skilled service jobs. The question almost begs itself. Why was Slovenia able to pull off a trick that no one else in the former communist world could from Estonia down to Bulgaria? (Croatia constitutes yet another model: Mediterranean tourism-based, low employment, low trade, with a myriad of small and medium sized companies.) The answer has to do with economic history. Unlike in other countries of the Soviet Bloc, where collective ownership of productive assetsmeant stateownership in gigantic production verticums, in Yugoslavia companies were decentralized into a system of self-management by the workers themselves, with some level of interference from local councils and municipal party organs. In contrast to sovietized economies, where only the select and reliable cadres of so-called imp- ex companies were allowed to travel, Yugoslav firms were authorized to trade with the West, and could even use their hard currency revenues to purchase technology and raw materials from abroad. Effective ownership brought with it a sense of identification, which lasted into the late eighties. When the national beer maker or the country’s largest bank were set up for sale to foreigners, Slovenes took to the street to protest. “We have been making beer for centuries, why would we need a Belgian or South African owner to run our beer factory for us?” they asked. They had even become proficient in banking. From the sixties onwards, the Tito regime instituted a two tier banking system, where firms had to convince commercial banks about the feasibility of their plans, much like in a market economy.

Tiny Slovenia had only one thirteenth of the population of Yugoslavia, yet Slovene firms accounted for an estimated one third of Yugoslav exports. They could rely on cheap inputs of labour and raw materials from the rest of the federation as they inserted themselves into the supplier chains of Austrian, German and Northern Italian manufacturers. Slovene exports went in equal proportions to the West, the Eastern Bloc, and the other South Slav federal units. They even developed their well-recognized own brands from kitchen furniture through fashion to pharmaceuticals. Sovietized economies in the same period were financed from the soft budgetary constraints of the plan, were exporting through the imp-exes mostly towards the East, and were banned from importing new technology both by their own governments and by the US-inspired Cocom lists.

Unlike Poles or Romanians, Slovenes could travel abroad freely, and could even work in Germany or Austria on a permanent basis as “gastarbajterci” (from the German word Gastarbeiter, meaning guest worker). The Tito regime was not concerned about whether they would return, and was even happy about the sizeable remittances of foreign currency and the skills learned. Economists from Ljubljana had access to scholarships in the West and in the US, where they saw the downsides of capitalist economies as well as their upsides. They became streetwise in the global game of competition between firms and their supportive governments, and could not be fooled like Eastern Bloc economists into believing that foreign ownership of companies did not make a difference as long as they were privatized.

Slovenia also has a relatively peaceful and cooperative political culture. The former communist elite was well-educated, Western looking and pragmatic, and quickly found consensus with politicians from the emerging new parties, whom they found to be similar in attitude. What seems like constant political bickering and rampant corruption to the Slovene public is mild and laughable in contrast to the cold civil war sand oligarchics tatecapture further to the East. The culture of consensus-seeking, the involvement of trade unions, employers associations, municipalities and non-governmental organizations in policy making makes Slovenia fall into the economic model known as Rhineland corporatism, which includes Germany, the Netherlands and Austria amongst others.

The jury is still out on the economic fate of the new Eastern periphery of the European Union. The data is not promising. One tiny country of two million, Slovenia, however, has already established itself as a successful, affluent Western nation.




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