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Slovenia: OECD Praises Economy, Says More Reforms Needed

Prague, 14 May 1997 (RFE/RL) -- A report released today by the Organization for Economic Cooperation and Development (OECD) says that Slovenia's economy, in terms of development, now has more in common with western Europe than it does with other former Communist countries.

But the Paris-based OECD warns that growth of Slovenian productivity and export trade is slowing down. The report says policies implemented by Ljubljana in the next two or three years will be crucial for maintaining long-term economic growth.

The OECD report praises Slovenia's "prudent fiscal discipline," saying that this has been a "main pillar" of reform since Ljubljana declared independence from the former Yugoslavia in 1991.

It says Slovenia's banking sector is now in relatively good health compared to other transition countries, and that trade has been largely oriented towards western Europe.

The report urges Ljubljana to build on this strong base. It says clear steps to lower inflation are now needed, as well as moves to ease pressure on the state budget -- such as curbs on the growth of real wages in unproductive sectors. It says all of these measures must be integrated with social, financial and labor market reforms.

The OECD also is recommending moves to encourage greater foreign investment in Slovenia. It says "only continued openness to international markets and a good diffusion of technology and information" can ensure the economic restructuring that is still needed.

But events in Ljubljana this week indicate that political battles lie ahead over foreign investment issues. As part of a European Union association agreement reached a year ago with Ljubljana, Slovenia agreed to amend the country's constitution so that foreigners can own land. But the association agreement has yet to be approved by parliament. Slovenian Prime Minister Janez Drnovsek yesterday was still struggling to put together the two-thirds parliamentary majority needed to change the constitution.

Today's OECD report predicts that Slovenia's Gross Domestic Product (GDP) will grow by 3.5 to 4 percent per year in 1997 and 1998. But it warns that a corresponding drop in the inflation rate is not likely because of the expected liberalization of price controls -- including energy prices. A proposal for a new value-added tax also could contribute to inflationary pressure.

The OECD says Slovenia's central bank should build more confidence in the local currency, the tolar, by publishing its objectives. This would help financial markets and the public to understand and anticipate adjustments to monetary policy. It also would eliminate speculation about whether the central bank is trying to hold down inflation or support the competitiveness of exports.

The OECD considers growth of real wages in unproductive sectors to be a burden on the state budget that also contributes to inflation. In the OECDUs view, there has been too much focus on keeping wages close to the national average.

Political pressure for wage increases is coming from labor unions. Last week, the rail workers union launched a four-hour warning strike because their monthly salaries are nearly 10 percent lower than the national average.

The OECD recommends a more comprehensive medium-term strategy that decentralizes wage setting and phases out wage index mechanisms altogether. It says wage increases should be linked to productivity gains rather than social or political considerations.

The pension system is considered by the OECD as another burden on the budget where policies must be adjusted soon. The report says Slovenia's current "state-run, pay-as-you-go" scheme is not sustainable even in the short term. Funding now comes from social security contributions and transfers from the state budget. The OECD says the pension system should be reformed as soon as possible.

Ljubljana is now considering a three-pillar pension system that would incorporate private pension funds. The OECD advises that an effective regulatory regime be created first to ensure that the newly emerging pension funds are financially sound. It says strict regulations also should promote competition among the different funds.