Slovenia - The Star Pupil

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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Written December 2001

Updated May 2005

The most exciting event in Slovenia in December 2001 was when a group of young army recruits spat on the national flag and sang the anthem of the now defunct former Yugoslavia. They were sent to a military psychiatrist for observation. Indeed, economically speaking, a preference for any other part of the late Federation over Slovenia would indicate mental deformity.

Slovenia is by far the most prosperous and pacific of the lot. Income per capita increased by 7% annually between 1995-2000 and reached 75% of the EU's average ($13,734 in mid-2004). Gross Domestic Product (GDP) growth rates (4% in 2001, down to 2.3% in 2003) are still double the European average and GDP per capita is almost equal to Greece's or Portugal's. Yugoslavia and Macedonia would require half a century to reach this level at their current growth rates.

Slovenia's public debt is negligible (c. 26% of GDP), its unemployment rate is almost American (less than 7% in 2004), its budget deficit a mere 1.4% of GDP. Slovenia's gross national savings is almost a quarter of its GDP - as is its gross domestic investment (28%). Moreover, agriculture comprises only 3% of its GDP sources - the rest is made up of industry (35%) and services (62%).

Slovenia is a respected member of both the World Bank and the IMF. The former has disbursed c. $250 million for purposes such as structural reforms and environmental cleanups. The latter praises its monetary targeting, the managed float of its tolar, and the lack of major (budget and current account) imbalances. This, despite erratic monetary management by the Bank of Slovenia, which, together with the introduction of VAT, the oil price shock, and a totally CPI-indexed financial environment, led to escalating inflation (c. 9% annually in 2001, up from an average of 6% - it is now down to 3.8% year on year in July 2004).

Slovenia's failure to secure agricultural and regional development concessions from their counterparts in Brussels, runs the risk of rendering it a net creditor of the EU. Slovenia, contrary to most other current members, was openly unhappy with the "Big Bang" enlargement of the Union. It has successfully concluded all 29 chapters to be agreed with the EU prior to accession and dreaded being held back by an unrealistic, politically motivated, process of enlargement which strained the EU's deficient institutions to their breaking point.

Slovenia is small. It is the size of pre-1967 Israel or New Jersey. With less than 2 million citizens (88% of which are ethnic Slovene), its population grows by a paltry 0.14% p.a. Still, had it not constituted the northern boundary of a war prone and unstable region, Slovenia might have attracted more FDI (it has one of the lowest rates among the new members of the EU), bordering as it does and integrated as it is with the (relatively) large and disinflated economies of Italy, Hungary, and Austria.

Many Slovenes actually live in Jorg Haider's part of Austria (Carinthia). Italians owned property (confiscated by the communists) in Slovenia before the Second World War (the source of a simmering grudge in Italy). Italians, Austrians, and Germans are invested in Slovenian banks, insurance companies, and industry.

Together with Poland, Hungary, and the Czech Republic (among others), Slovenia is a member of the now reawakened CEFTA (Central European Free Trade Agreement). Still, to its great ire, it is often associated with the Balkans.

But the bad neighborhood is not the only obstacle. Slovenia's privatization was as crony-infested as elsewhere in the Eastern Bloc and its legislation still incorporates investment-deterring anachronisms (restricted land and media ownership, an over-regulated labour market, lack of corporate governance). Capital account liberalization was implemented only recently. Close to half of the economy (including a chunk of the favoritism-ridden and inefficient banking system) is in the hands of the state. The private sector, though, is thriving.

It is amazing that Slovenia's prosperity has been achieved without much foreign investments. Slovenia dismantled its socialist economic legacy torturously slowly during the 1990s. The corporate tax rate is still a non-competitive 25%. Payroll taxes are high (employers pay 16% of gross wages in social security contributions alone). Value Added Tax (VAT) is at a standard of 20% (with a reduced rate of 8.5% for food, education, and other essentials).

A withholding tax of 25% is levied on all forms of investment income (interest, dividends, etc.). Individual tax rates are prohibitive (up to 50% from January 1, 2005) and apply to the income in or from Slovenia of non-residents as well. Capital taxes are as high as income taxes. Slovenia signed a mere ten tax treaties in its 15 years of existence (though it had adopted 14 Yugoslav tax treaties to complement them).

Slovenia's international trade amounts to 60% of its GDP. According to a July 2004 report by Deloitte Touche Tohmatsu and the Economist Intelligence Unit (EIU), Slovenia ran a $700 million trade deficit in 2003 (the difference between $12.9 billion in exports and $13.6 billion in imports).

Slovenia's main markets are the European Union (Italy, Germany, and Austria) and Croatia, another former Yugoslav republic. Two thirds of its trade is with the EU (half of this with Germany and Austria, the former colonial mater). Its exchange with Russia, the USA (3% of the total each), and even with other republics of the disintegrated Yugoslavia is marginal. It still purchases raw materials from Macedonia and Yugoslavia - and sells back to them the finished products (as it used to do in former Yugoslavia). But this does not amount to much.

The decoupling is intentional - Slovenia considers itself an integral part of Western Europe. All it inherited from Communism, it feels, was polluted rivers and coastal water, acid rain, and depleted forests. Still, such exposure to the EU makes Slovenia susceptible to the Union's business cycles. Shortsightedly perhaps, until 2002 it did not have a trade representation or an economic attaché in the USA.

Of all its erstwhile confederates, Slovenia maintains tenuous political contacts only with Croatia. At the end of 2001 it resolved a long standing dispute with Croatia regarding the Krsko nuclear power plant. Both countries agreed to continue discussions regarding the final demarcation of the hotly disputed (in Slovenia) border between the two as a prelude to the introduction of the Schengen agreement. Overtures are made to post-Milosevic Yugoslavia. Slovene legislation is eagerly copied by Macedonia. Gradually, albeit reluctantly, Slovenia comes to be regarded as a role model by its southern neighbors who strive to emulate its success.

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