Yugoslavia was always an outlier in economic models of communist countries, with its different system of ownership and isolation from the CMEA. Slovenia, in turn, with its specially Western outlook and relative wealth was always an outlier in comparison to the rest of Yugoslavia. However, upon the fall of the Berlin Wall and the collapse of communism throughout the region, Slovenia faced many of the same challenges which confronted other countries of Central and Eastern Europe. As the author shall endeavour to show, it has dealt with them with some success and in a manner which may prove useful for other transitional economies. After firstly giving some historical background, the author shall examine Slovenia's attempts at stabilisation and evaluate its success at fiscal reform, banking reform and privatisation.
Background
After the Second World War, a special brand of socialism developed in Yugoslavia under the rule of the iconoclastic Marshall Tito. Ownership of the means of production was defined as 'social' rather than 'state' - a formulation much closer to Marx's original concept than ever existed in the Soviet Union - and firms were managed by workers councils. No central planning existed after 1965 and each republic was given a high degree of autonomy.
For historical and political reasons Yugoslavia was never a member of the CMEA. Consequently trade was orientated much more towards the West and was thus more market-orientated than in any other country in Eastern Europe. As Pleskovic and Sachs put it, 'in general there was not a chronic shortage economy in the industrial sector or in consumer markets, so that inputs were available on a fairly reliable basis.' This enabled Yugoslav firms, exemplified by Elan, a Slovenian ski manufacturer, to compete on quality in the West, something only a handful of firms throughout the region had been able to do. Economic reform had meant that 40% of prices had been liberalised by 1987 and this increased further during the following two years. By the end of the 1980s, then, the Yugoslav economy was moderately open, prices and imports were relatively free and the budget was more or less balanced. In spite of this, lax monetary and fiscal policy coupled with an unstable political situation, meant that Yugoslav economic performance had deteriorated considerably. Output growth averaged a mere 0.6% over the decade, unemployment 14% and, by 1989, inflation had spiraled to 2,800%.
Slovenia, with a population of about two million people, was the most northerly of the republics that made up the Yugoslav federation, and bordered on Austria and Italy. Its history and geographical location had meant that it was approximately 1.75 times richer than the Yugoslav average. As a result the Slovene contribution to the federal budget was 16.8% even though it had only 8.4% of the population. As the gap between Slovenia and the rest of the country widened, Slovenes became less and less willing to subsidise the overwhelmingly non-Slovene federation. It lies outside the scope of this paper to determine how much of the rationale behind independence was economic and how much was due to other factors. Suffice to say, however, that the Slovene economy was not overly dependent on the national market, and enjoyed a high degree of decentralisation and positive net outflows, all of which provided an economic basis to secession. The general election of May 1990 produced a Slovene government whose economic policy, according to Mencinger, 'was set by the premise that prospects of transition to a market economy were worsening; the economic policy of the federal government mistaken, the existing economic system unsuitable, and the Federation facing political turmoil.' A referendum on independence passed with the support of 90% of the people on the 26th of December. Negotiations with the federal government came to naught and on the 26th of June 1991, Slovenia declared its independence. The federal government resisted this violently meaning that it was not until the 8th of October that Slovenian independence became a reality. Recognition by the European Union was not to come until the 15th of January 1992. In the meantime the rest of Yugoslavia descended into chaos.
Stabilisation
Stabilisation within Slovenia had begun before independence, as, indeed, it needed to, with inflation running out of control. Although prices were largely liberalised, federal policy was acting as a drag on reform. As a result, 'the Slovene government, having realised that the prospects of transition to a market economy within Yugoslavia were worsening, ... focused on pragmatic adjustments to policy measures of the federal government, on an acquisition of policy tools, and on a gradual construction of a normal economic system.' More drastic measures would begin after independence. Although Slovenia was able to make a relatively clean break, independence was not without its costs, however. As Cvikl points out, in 1987 still over a third of exports went to the rest of Yugoslavia and many firms depended on it to create economies of scale. The loss of this market could not be underestimated. An estimated 6% drop in GDP was the direct result of independence and the civil war in what was left of Yugoslavia. This, however, was small in comparison to the shock caused by transition itself: industrial production shrank by 38% between June 1989 and June 1992. And yet, 'in a year, Slovenia increased its relative competitiveness, established sovereignty in the fiscal and foreign exchange systems, and prepared institutional settings for a 'new' country.' According to Pleskovic and Sachs, 'an effective stabilisation programme requires a determined and strong government to enforce a strict monetary and fiscal policy, and financial discipline on enterprises and government.' Stabilisation was achieved by autumn 1992, primarily through two mechanisms: the introduction of a new currency, and the creation of an independent central bank.
The Bank of Slovenia and the Tolar
A certain amount of monetary independence existed in Slovenia already. Since the late 1980s, an exporter who sold foreign exchange to the bank had been able to receive a convertible certificate of export privileges which allowed the bearer access to hard currency. The fixed exchange rate plus the price of the certificate totaled the flexible rate of exchange. In addition in May 1991, the 'Slovene ECU' was introduced as a unit of account, 'its value was to be determined by the average weekly price of the certificates on the Ljubljana stock exchange.' Thus, for some transactions, there existed a de facto second currency. However a proper currency was needed because Serbia was printing money to finance its war efforts. This was causing further inflation and making monetary stability under the dinar impossible. The experience of expansionary monetary policy lead to the establishment of an independent central bank, the Bank of Slovenia (BOS). According to Cvikl, this was 'crucial to implementing macroeconomic stabilisation policies after October 1991.' In contrast to the Yugoslav central bank, it could only give short-term loans to the government to cover cash flow problems, thus preventing the monetising of deficits. The law mandated the BOS alone to execute monetary policy, free from political interference. Price stability and smoothly functioning domestic and international payments were its only objectives.
But would the new currency have a fixed or floating exchange rate? According to Mencinger, who was a deputy prime minister at the time, 'the debate on pegging versus floating reflect two opposite approaches to the transition in Slovenia in general: a radical and a gradual approach.' In the end, though, there wasn't much choice. Although conventional wisdom favoured the fixed approach, Slovenia, for reasons explained below, didn't have the foreign exchange reserves to back it up and even if it had, fluctuating trade patterns made it impossible to determine the proper fixed rate ex ante. In October 1991, the tolar, as it was called, was introduced with surprising smoothness. Bank deposits were converted automatically on a one-to-one basis and 86 billion dinars (about $75 per person) in cash were also exchanged in a very short period. The law already allowed contracts and even wage agreements to be denominated in foreign currency (as a means of inflation-proofing) so there was no change required here. However the principal reason for the ease of introduction was the fact that more than 80% of household monetary savings were in foreign currency deposits. Special accounts had been set up for emigrants' remittances (especially Gastarbeiter in Germany) as well as for the local domestic population. Deposits were credited to households while the foreign exchange was transferred to the National Bank of Yugoslavia in Belgrade to be used in debt servicing or in foreign exchange market intervention. Thus Slovenia itself initially lacked the foreign exchange reserves it needed to defend the tolar or even to pay out these deposits. This lack of foreign exchange led to some exchange restrictions at first. Initially the tolar started off at a rate of 32 to the Deutschmark. It immediately rose to 42:1 and by January 1992 had reached 56:1. It was at this point that, thanks to highly restrictive monetary policy, the exchange rate stabilised.
Fiscal Reform
Fiscal policy had been under Slovenian authority since 1974. Yugoslav law prevented individual republics from running deficits, so prudence prevailed. In spite of this, there were some blatant inefficiencies in the system, caused principally by Slovenia's very decentralised public sector. Each commune had independent authority to administer expenditures and set taxes. The same was true for social security contributions. Most public services, such as health and education were financed through earmarking funds at various community levels. To compound the confusion, each commune had its own budget. It was therefore impossible to accurately measure consumption and savings. Reform of the system occurred in early 1991. Direct taxation was revised and simplified. More comprehensive corporation and income taxes were introduced. Social insurance contributions were slashed and all previous off-budget funds were brought into the open. Revenue, however, was below target because of the shock of transition. The restriction on monetising the resulting deficit meant that government expenditure was cut considerably, from 48.9% of GDP in 1990 to 43.2% in 1991 (although much of these savings were accounted for by the ending of the federal budget contribution). This resulted in a budget deficit of just 2.6% in 1991. Much structural reform remains to be implemented however.
Banking and Financial Reform
The financial sector plays a key role in the transition process. It is paramount for resource allocation and mobilisation, and a prerequisite for any large-scale privatisation scheme. A lack of financial regulation in Slovenia has produced many problems. Firstly, most banks were owned by the firms to whom they lent. As a result, 30-40% of loans on the books were non-performing. This, combined with a monopolistic structure, has lead to exorbitant lending rates, preventing many viable enterprises from access to capital. In addition the banking system requires recapitalisation and investment to improve service. Banks were audited in 1991 and in the autumn of that year, the Bank Restructuring Agency was founded to deal with these problems and to help restore competition. In the spring of 1992 a partial restructuring programme was prepared which included a proposal to issue bonds to cover the frozen foreign exchange deposits, but this was rejected by parliament. In spite of this, most banks have been privatised; indeed, only two banks are still state-owned. Capital markets remain in their infancy though. Thirty-three banks and financial institutions founded the Ljubljana Stock Exchange in December 1989, but, as of yet, only they can buy its shares, although other institutions can become members. Most of the trading is accounted for by government bonds not equities, however.
Privatisation
Because of its unique method of ownership, the challenge facing Slovenia when it came to privatise its enterprises was one quite dissimilar to that faced by other transition economies. Because firms were owned by 'everybody and nobody' and not by the state, the government could not force a company into privatisation: the initiative had to come from the firm. The 1988 Mikulic commission had proposed radical changes in the structure of ownership and constitutional amendments were enacted to this end. A new economic and labour relations code was introduced, four types of potential ownership were defined (social, co-operative, mixed and private), and the business firm was created as a legal entity. Although half-hearted 'they nevertheless created preconditions for a rather swift transition to a market economy unthinkable in other countries of Central and Eastern Europe.' However, as Yugoslavia began to break up, the Slovene parliament suspended privatisation because it viewed the method as the giveaway of social property, thus leaving property rights in limbo.
Since then progress has been slow. Part of the reason has been due to a fundamental dichotomy on the goals of privatisation. Is privatisation merely a means of increasing efficiency, or are there valid distributional issues too? There existed two rival privatisation codes corresponding to each view. The first, an internal privatisation model proposed by Mencinger, among others, was gradual, commercial and decentralised. Firms themselves would be the instigators of privatisation and management or worker buy-outs would be encouraged; the government would merely act as a rule setter. This laid the emphasis on sales rather than distribution and had the advantage of seeming suited to a relatively efficient economy. It would rely on existing infrastructure, would be reasonably cheap and easy to administer, and would avoid institutional shocks. Above all it would make sure that the people who wanted the shares got them, and that the new owners were free to choose the company form. However valuation problems could lead to windfall gains for investors and it would have perpetuated the existing, socialist, management structure. A second proposal led by Sachs, among others, wanted to introduce a voucher scheme, similar to that used in Poland and Russia. Shares would be distributed to citizens free of charge, either through vouchers of via institutional companies who would manage the funds. This would immediately create a Western model of ownership and was equitable. However it neglected efficiency issues and produced a large number of 'passive' owners. In some ways it was simply maintaining ownership by 'everybody and nobody'. The political turmoil which resulted was not just about the efficacy of the different models, but rather a struggle over who was going to end up owning or controlling Slovenia's assets. The dispute ultimately caused the fall of the government in April 1991.
In the meantime privatisation continued in a haphazard manner. In autumn 1991, in spite of broad popular support, a second draft law was blocked by the third legislative chamber, itself representing the managers of the firms to be privatised. The Law on the Transformation of Social Ownership was finally passed at the end of 1992. A Privatisation Agency and Development Fund were established. The Privatisation Agency would have a monitoring brief, the Development Fund would actually manage the disposal of shares. 20% of shares in their enterprises would be distributed to workers and managers for free. Forty percent of the shares would be reserved for institutional investment funds, vouchers in which would be given to the people. The remaining 40% would be sold to workers and managers, or outside investors. It allowed for quick privatisation with a majority of active over passive shareholders, but didn't clarify the position on property rights. Nevertheless, by June 1995 over 685 companies had reached first stage approval, and a further 210 had reached the second stage.
Assessment
As Cvikl puts it, Slovenia has been a 'pathbreaker in stabilisation and currency reform.' Real economic growth is estimated to have been 5.5% in 1995. The exchange rate is stable and unemployment is falling. Per capita income is the highest in Eastern Europe. Slovenia joined the World Trade Organisation in June 1995, has brokered a free-trade deal with EFTA and grows ever closer to the EU. Although progress has been slow on privatisation and financial restructuring, the delay has proved neither catastrophic nor insurmountable. There may not be a Slovenian model to copy but there is much that it can offer to other post-communist economies.
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