The Globe and Mail, August, 7, 1996:

Old Attitudes Slow Reform In Slovenia

The country of Slovenia, which is by far the richest and closest to membership in the EU, is also one of the few that never dumped its Communists.

by GREG IP,The Globe and Mail

To a visitor, Slovenia feels like Western Europe. The streets of the capital, Ljubljana, are jammed with late-model cars. Public transit, banks and telephones operate with Western efficiency.

"Things work here," a Western diplomat said. And they traditionally have.

Slovenia is by far the richest country in Eastern Europe. It is one of only two with an investment-grade credit rating. It is one of the closest to membership in the European Union.

It is also one of the few that never dumped its Communists.

In virtually every former planned economy in Europe, Communists are vilified as the architects of inefficient economies that produced shoddy goods and perpetual shortages. Poland and Hungary only began electing Communists after the pain of transition to capitalism under non-Communist rivals. But in tiny Slovenia (population two million), which seceeded fromYugoslavia in 1991, life was pretty good under the local Communists. After all, they didn't act much like Communists. Many Slovenes owned private property. The country traded heavily with the West and people were free to leave for weekend shopping trips in neighoring Austria and Italy. About 88 per cent of the population is Slovenian. The rest is made up of Italians, Croats, Serbs and others, making the country ethnically more homogeneous than Croatia or Bosnia.

Yugoslavia put up only a brief struggle to keep Slovenia from seceding, which is why only 45 people died in its one-week war of independence, while ethnic fighting has killed tens of thousands in Croatia and Bosnia. As a result of its long-standing trade links with the West, Slovenia boasts internationally competitive firms in pharmaceuticals and tele-communications .

The contrast with neighbouring Croatia - which also split from Yugoslavia in 1991 and is the next most developed of the former Yugoslav republics - is especially telling.

In 1994, Slovenia's per capita gross domestic product was $7,040 (U.S.), Croatia's was $2,560. (Canada's was $19,510.) Between 1989 and 1992, as their economies adjusted to political unheaval and the transition to capitalism, Slovenia's GDP fell 17 per cent while Croatia's dropped 35 percent. Yet in attitude, Croatia is the more capitalist of the two countries .Its privatization and liberalization programs have been more sweeping and its attack on inflation more effective, and tens of thousands of small businesses have sprung up. While the statistics suggest that Croatia has had the rockier transition, Croatian leaders like to point out that theirs has come with more conviction than Slovenia's. Explaining the difference, Croatian parliamentarian and economist Duro Njavro says with a smile: "Through the past five years, the Slovenian leadership has been in Communist hands. That's one small difference. They're very reformed Communists, but they're the same people who managed Slovenia for the last 50 years. Completely the same."

Slovenian President Milan Kucan was one of the Yugoslavia's collegial Communist leaders. Until last winter, Slovenia's Communist Party, renamed the United List, was part of the country's governing coalition.The continuity of leadership has lent a left-leaning, parochial flavour toSlovenian politics, which has hampered the economy's transition from socialism and at times antagonized neighbours. This is apparent in how it has gone about privatization.

In the former Yugoslavia, companies were owned not by the state, as in other Communist countries, but by the citizens, and were managed by their workers, at least in theory. Joze Mencinger, Slovenia's best-known academic economist and a former government minister, said this meant that in practice no one owned the companies. On the advice of Western advisers led by Harvard University economist Jeffrey Sachs, every Slovene has been issued privatization cerificates, worth between 4,000 and 6,000 German marks each, to buy shares in companies as they are privatized. Managers and employees get preferential terms for buying shares in their own companies at 50 percent discount.

"My main problem with these Western advisers is they were central planners," said Dr. Mencinger, who opposed the scheme while in government." Dr. Sachs would create capitalism by decree." Indeed, Slovenia now has shareholders, but not really capitalists. On average, managers and employees own 47 per cent of privatized companies. Dr. Mencinger said such owners are more concerned with preserving their own jobs and privileges than maximazing profit. The result is a corporate sector that in practice behaves much as it did under Yugoslav communism." The problem we find is this internal ownership prevents the most profitable decisions" from being made, admitted Marko Rems, an official in Slovenia's agency for restructuring and privatization. For example, many companies haven't sold unproductive land because employees like to use it for vacations and recreation. They also find it difficult to lay off unnecessary employees.

About 38 per cent of shares are now held by bank-managed investmnet funds and other institutional investors. But the funds have focused on extracting dividends to cover their management fees, robbing the companies of cash to reinvest. One result is that few Slovenian companies undergoing privatization are profitable. The lack of foreign and domestic interest has left most of the 30 companies now listed on the Ljubljana stock exchange trading at just a quarter of estimated book value, Mr. Rems said.

TAM, a giant state-owned truck and bus plant in Maribor, a major industrial city about 100 kilometers northeast of Ljubljana, has been a massive money loser since it lost its main customer, the Yugoslav army, five years ago. But fearful of aggravating an already high unemployment rate, the government waited until May before putting TAM into bankruptcy, which will slash its payroll to 1,200 from about 5,000. Slovenia has aroused the most criticism by making it extremely difficult for foreign investors to buy its companies and by showing a xenophobic streak when they do. When a Czech company bought Videm Krsko, a bankrupt pulp and paper company, last spring, it aroused such vocal opposition from Slovenes that it cast a pall over Czech-Slovene relations. The government resisted calls to renationalize Videm, but otherwise continues to resist foreign takeovers. "We didn't want the bad experience some of the countries in transition had where the good things were all bought by foreigners and the bad things were left for locals," said Marija Adanja, deputy director of European Union relations in the Slovenian foreign ministry.

"The Hungarians are concerned because they sold almost everything and they have no influence any more in the main sectors of industry," said Zoran Stamatovski, whose job at the Slovenian trade and investment promotion office is to attract foreign investors. When you combine that attitude with a small market and high wages, it's not surprising that Slovenia has attracted proportionately far less foreign investment than other Eastern European countries. Indeed Iskra, a Slovenian telecommunications company, has moved some manufacturing to Malasyia because of high labour costs at home. Now, however, entry into the EU appears to be forcing Slovenia to confront these problems. It became an associate member in June and hopes to become a full member by 2001. The lower tariffs that membership brings will force its industries to face full-blown competition from Europe's biggest companies. Barriers to foreign investment will have to be lifted; it achieved associate membership only after it eased laws aginst foreign landownership that had peeved Italians.

Slovenia is thus ackowledging that it must abandon its old ways sooner rather than later, because if there's anything it finds more disquieting than the prospect of full-fledged capitalism, it is sliding back into the orbit of the strife-torn Balkans.

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              GNP per capita
              $U.S., 1994
              --------------
Slovenia        7,040
Hungary         3,840
Czech Republic  3,200
Russia          2,650
Croatia         2,560
Poland          2,410
Slovakia        2,250
Ukraine         1,910
Romania         1,270
Albania           380

Source: World Bank
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