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Slovenia - The Star Pupil

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The most exciting event in Slovenia last week was when a group of young army recruits spat on the national flag and sang the anthem of the now defunct former Yugoslavia. They were sent to a military psychiatrist for observation. Indeed, economically speaking, a preference for any other part of the late Federation over Slovenia would indicate mental deformity.

Slovenia is by far the most prosperous and pacific of the lot. Income per capita increased by 7% between 1995-2000 and reached 75% of the EU's average. Yugoslavia and Macedonia would require half a century to reach this level at current growth rates. Slovenia's public debt is negligible (c. 26% of GDP), its unemployment rate is almost American (less than 7%), its budget deficit a mere 1.4% of GDP. Slovenia's gross national savings is almost a quarter of its GDP - as is its gross domestic investment (28%).

It is a respected member of both the World Bank and the IMF. The former has disbursed c. $250 million for purposes such as structural reforms and environmental cleanups. The latter praises its monetary targeting, the managed float of its tolar, and the lack of major (budget and current account) imbalances. This, despite erratic monetary management by the Bank of Slovenia, which, together with the introduction of VAT, the oil price shock, and a totally CPI-indexed financial environment, led to escalating inflation (c. 9% annually, up from 6%).

Thus, should Slovenian officials fail in their efforts to secure agricultural and regional development concessions from their counterparts in Brussels, Slovenia runs the risk of becoming a net creditor of the EU. Slovenia, contrary to most other current members, is openly unhappy with the "Big Bang" enlargement of the Union. It has successfully concluded 22 out 29 chapters to be agreed with the EU prior to accession and it is afraid of being held back by an unrealistic, politically motivated, process of enlargement which will stress the EU's deficient institutions to their breaking point.

Slovenia is small. It is the size of pre-1967 Israel or New Jersey. With less than 2 million citizens (88% of which are ethnic Slovene), its population grows by a paltry 0.14% p.a. Still, had it not constituted the northern boundary of a war prone and unstable region, Slovenia might have attracted more FDI (it has one of the lowest rates among the candidate countries), bordering as it does and integrated as it is with the (relatively) large and disinflated economies of Italy, Hungary, and Austria. Many Slovenes actually live in Jorg Haider's part of Austria (Carinthia). Italians owned property (confiscated by the communists) in Slovenia before the Second World War (the source of a simmering grudge in Italy). Italians, Austrians, and Germans invest in Slovenian banks, insurance companies, and industry. Together with Poland, Hungary, and the Czech Republic (among others), it is a member of the now reawakened CEFTA (Central European Free Trade Agreement). Only 4% of Slovenia's GDP derives from agriculture (vs. 61% from services). Still, Slovenia, to its great ire, is often associated with the Balkan.

But the bad neighborhood is not the only obstacle. Slovenia's privatization was as crony-infested as elsewhere in the Eastern Bloc and its legislation still incorporates investment-deterring anachronisms (restricted land and media ownership, an over-regulated labour market, lack of corporate governance). Capital account liberalization was implemented only recently. Close to half of the economy (including a chunk of the favoritism-ridden and inefficient banking system) is in the hands of the state. The private sector, though, is thriving. Growth rates (4% this year) are double the European average and GDP per capita is almost equal to Greece's or Portugal's.

Slovenia's international trade amounts to 60% of its GDP. Two thirds of it is with the EU (half of this with Germany and Austria, the former colonial mater). Its trade with Russia, the USA (3% of the total each), and even with other republics of the disintegrated Yugoslavia is marginal. It still purchases raw materials from Macedonia and Yugoslavia - and sells back to them the finished products (as it used to do in former Yugoslavia). But this does not amount to much. The decoupling is intentional - Slovenia considers itself an integral part of Western Europe. All it inherited from Communism, it feels, was polluted rivers and coastal water, acid rain, and depleted forests. Still, such exposure to the EU makes Slovenia susceptible to the Union's business cycles. Shortsightedly perhaps, it does not have a trade representation or an economic attaché in the USA.

Of all its erstwhile confederates, Slovenia maintains tenuous political contacts only with Croatia. It just resolved a long standing dispute with Croatia regarding the Krsko nuclear power plant. Both countries agreed to continue discussions regarding the final demarcation of the hotly disputed (in Slovenia) border between the two countries as a prelude to the introduction of the Schengen agreement. Overtures are made to post-Milosevic Yugoslavia. Slovene legislation is eagerly copied by Macedonia. Gradually, albeit reluctantly, Slovenia comes to be regarded as a role model by its southern neighbors who strive to emulate its success.

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