Slovenia in Transition

Catching-up performance determined by initial conditions,

stabilisation measures and structural reforms

Three factors appear to significantly influence the catching-up of an economy: initial

conditions, stabilisation measures and structural reforms (Berg et al., 1999, Falcetti

et al., 2000, Fisher et al., 2004, World Bank, 2004). First, initial conditions, being

intimately related with production factor endowment and the efficiency with which

they are processed, determine the level of a country's development. Second, as the

country faces an abrupt shock to the system following the breaking down of the

prevailing political and economic institutions, stabilisation measures Ð'- notably, timely

adoption of sound macroeconomic policies Ð'- are in order. The success of these

measures can be measured by the general government balance relative to GDP and

the annual rate of inflation. The third factor with an impact on the catching-up

process is structural reforms. While establishing and preserving stability is typically

the main focus of policy action, policy-makers also attempt, to varying degrees, to

restructure the economy, which is considered to benefit growth in the longer term.

Liberalisation and privatisation, in particular, have been judged essential. In its

recent study, the EBRD (2004) finds that reforms have a robust, positive influence

on growth and that "a sustained commitment to reforms will bring substantial

benefits over the longer term" (p.14). The link between a better starting point and

growth has also been shown to be non-negligible, although its effect withers over

time (European Commission, 2004).

It is possible that as the effect of initial conditions dies away other factors become

increasingly important. Moreover, the level of development at the start of transition

might very well determine the reform path. Hence, Slovenia may have achieved a

good performance due to favourable initial conditions, which has consequently

allowed it to rest on its laurels and make less of an effort to reform and restructure

the economy ready for EU entry.

Thriving on good initial conditions

Following a short recession, which affected all countries at the start of transition,

Slovenia regained its strength as real GDP growth picked up in 1993, thereafter

remaining steady at 3-5% per annum. Despite being considered a small, open

economy, with two million inhabitants, it has managed to offset relatively well the

negative consequences of economic downturns in the international environment.

Growth stayed impressively stable and robust (Chart 1a) as domestic consumption

spurred activity when external demand failed to support it. Note, however, that of the

whole subset of comparable transition countries in terms of market size, Slovenia

has recorded the lowest growth rates since 2001. On the other hand, some of the

countries have yet to regain the real GDP levels attained in the period preceding the

transition, whereas Slovenia has fully recovered from the slack period (Chart 1b).

Already relatively well developed when it declared its independence, it has

succeeded in making further progress in converging to the EU level and achieving a

solid economic performance (Table 1).

Keeping the economy resilient through stabilisation

policies

Public finances

Over the transition, Slovenia managed to keep its public finances broadly in

balance. Although the general government balance slipped in 1997 and has since

Slovenia entered

transition as one of

the most developed

of the new Member

States

ECFIN Country Focus Volume 2, Issue 10 Page 3

been negative, the deficits have been relatively contained. In December 2001,

Slovenia started simultaneously adopting budgets for two consecutive years in an

effort to introduce greater certainty into the fiscal planning. For 2003, however, the

general government deficit was much higher than initially planned due to lower than

expected growth. In order to limit the budgetary impact of this kind of adverse

cyclical developments, the implementation bill attached to the 2004 budget

introduced a novel measure. The government was given discretionary power to

suspend new spending commitments in the event of a revenue shortfall within the

limits set in the bill. A revenue undershooting of up to 15 billion tolars (0.25% of

GDP) due to unfavourable economic conditions was to be compensated by a

proportional reduction of expenditure in the course of the year, without the need to

pass a supplementary budget. If unfavourable macroeconomic