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Slovenia: Economic Success Requires Constant Tending

Ljubljana, 13 December 1996 (RFE/RL) - Slovenia is often cited as one of Central Europe's economic success stories. Living standards are already approaching Western levels in most of the country, and Gross Domestic Product (GDP) per capita is more than double that of the Czech Republic or Hungary.

But some economists have expressed doubts about Slovenia's future. Success, they say, has been largely a legacy of the past and the country has little room for complacency if it wants to stay ahead.

The most economically-developed part of former Yugoslavia, Slovenia had a head start when it came to transition.

Geographic proximity and active trade links with neighboring Austria and Italy meant companies were able to keep abreast of technological developments and keep their products more or less up-to-date.

Yugoslavia's experiment with self-management meant that companies were in theory run by workers, but in reality managers were making the decisions.

This has now increasingly been shown to be an obstacle, not an advantage. Only about a half of formerly socially-owned companies have been privatized so far, the vast majority opting for inside ownership, bringing companies into the hands of those same workers and managers.

Heather Grabbe, European Program research fellow at the Royal Institute for International Affairs in London, argues that this could eventually have a disastrous effect on the economy.

"As an export driven economy, competitiveness is crucial to Slovenia," she says. "Companies may find it hard to remain competitive if managers and workers are the owners because they might not be willing to take the necessary steps. Outside owners would be more willing to make tough decisions and ensure that companies stay competitive."

Slow privatization is also one of the many factors affecting foreign investment, which remains sluggish. In this respect, Slovenia lags far behind countries like Hungary and the Czech Republic.

Besides obvious disincentives such as the country's relatively high labor costs (three times higher than in the Czech Republic) and the small size of the market, Slovenes are convinced that they themselves know best how to make their economy thrive.

Joze Mencinger, one of the country's leading economists and a board member of the central bank, argues that Slovenia has actually benefited from slow pace of privatization and has avoided the pitfalls of rapid sell-offs using vouchers.

"This is paper privatization," he says in an interview in his office, "an administrative introduction of the market economy which has been a disaster in the whole of Eastern Europe."

His argument, which is tinged with national pride, is that the Western privatizers, who created such models, did not take into account local conditions, prescribing the same cure for countries as diverse as Slovenia and Mongolia.

Mencinger says that, while there are few objections to foreign direct investment, the central bank tries to discourage the inflow of speculative foreign capital that could press down the exchange rate and harm the economy as a whole.

But with or without foreign help, Slovenia has made great strides in adapting its economy.

Having lost most of its market almost overnight when it left the Yugoslav Federation, the country quickly discovered new trading partners. It swiftly entered the World Trade Organization and directed its exports towards the West. It now carries out two-thirds of its foreign trade with the European Union, with which it signed an association agreement in June.

Slovenia is also a member of the Central European Free Trade Agreement, or CEFTA, which has provided a market for products that could not compete in the West.

But, analysts say, that while the long-term outlook is still good, the next government is facing some tough decisions if Slovenia is to stay ahead.

Industrial restructuring and deep cuts in social spending are needed, they say, for Slovenia to stay on target for EU entry and European economic and monetary union. With unemployment already running relatively high at 13 percent this will not be an easy task.

This is the first story in a three-part series about Slovenia's transition economy.