Slovenia: Emerging Europe’s secret success story

Slovenia: Emerging Europe’s secret success story
By Clare Nuttall in Glasgow March 10, 2021

Slovenia started the transition as the most prosperous state in the post-socialist space, a position it has held on to despite a severe debt crisis and stiff competition from several Central European economies that were booming until the coronavirus (COVID-19) pandemic struck. 

The small country’s post-independence history has been a series of firsts: it was the first Southeast European country to join the EU, the first emerging European country to join the eurozone and the first from the region to switch from borrower to donor status at the World Bank. It also outperforms the rest of the region, or at least is one of the leaders, on most human development indicators. 

The moving chart below produced using a World Bank data tool makes the point nicely. It dynamically shows GDP growth over the last 20 years. You can see the wealth gap between Western and Emerging Europe clearly, but you can also see how Slovenia overtakes Portugal, Western Europe's poorest national, in about 2002 and starts to close the gap with the rich nations until the 2008 global financial crisis knocks everyone back.

Slovenia’s strong starting point when it embarked on the transition was thanks to a variety of historical factors. Much of what later became Yugoslavia was under the Ottoman Empire for centuries, while Slovenia spend hundreds of years under the Habsburgs, along with modern-day Austria, Czechia and much of Central Europe. 

After the Second World War, a socialist government was installed in Yugoslavia, like the rest of Central, Southeast and Eastern Europe. Yet after Yugoslav leader Josip Broz Tito’s split from Moscow, leaving Yugoslavia as one of the leading non-aligned states in the Cold War, the federation was free to pursue its own economic policies, nationalising big companies while leaving smaller companies to operate independently, and it also benefited from Western loans. 

“Slovenia had the highest per capita GDP among all countries from this part of the world at the time they started their process of transition from planned to market economy. The reasons are partly on the side of specifics of the former Yugoslavia as whole and partly on specifics of Slovenia within Yugoslavia,” said Mojmir Mrak, professor and Jean Monnet Chair holder at the Academic Unit for Money and Finance at the Faculty of Economics, University of Ljubljana. 

“As far as Yugoslavia as a whole is concerned, its socio-economic model of development was quite different from the one in all other ex-socialist countries. While economies of all these countries were based on state ownership and central planning, Yugoslavia introduced a very distinctive system based on public ownership and [a] self-management economic system. Yugoslav companies operated within an economic system that contained many market or at least quasi-market elements in the areas of production and trade. As far as Slovenia is concerned, it was traditionally the most developed republic of the former Yugoslavia. This was made possible due to its geographical location on the border with Austria and Italy, diversified structure of the economy with a large proportion of final good production and well-educated labour force.”  

The socialist era saw the emergence of some of the companies that remain central to the Slovenian economy today. Among them are Gorenje, one of Europe’s largest household appliance manufacturers now majority-owned by China’s Hisense. Gorenje started out as a producer of agricultural machinery when it was set up by the government in 1950. Four years later the Krka lab was established, which has now grown into an international generic pharma company, selling to over 70 countries worldwide. Another internationally recognised Slovenian company is Elan, founded by ski jumping champion Rudi Finzgar who made skis for Yugoslavian Partisan forces during the Second World War. 

Slovenia's Elan now sells its skis all over the world. Source: Elan

Yet the relative prosperity of industrialised Slovenia, and to a lesser extent Croatia, in contrast to the poorer republics to the south, contributed ultimately to the break-up of Yugoslavia, along with the debt crisis that escalated during the 1980s. Igor Guardiancich, assistant professor at the Department of Political Science, Law and International Studies (SPGI) and Università degli Studi di Padova, pointed out that by the late 1980s, the gap in GDP proxies between Slovenia and Kosovo in the late 1980s was as high as 8:1. 

As early as the 1970s, the tensions within the Yugoslav federation were becoming apparent, as documented in one New York Times article from 1978, titled “Even in Yugoslavia, a rich-poor split”. The journalist wrote: “Slovenes are political realists, so no one here in their capital raises the subject of separating from Yugoslavia except to reject it. … But the political and economic crisis that has long confronted Yugoslavia has sharpened Slovenia's awareness that its two million people have the highest level of economic development among the republics and provinces that make up this federal country of 23 million.” This raised the question of “whether northern Yugoslavia is paying too dearly for the south”.

By the early 1980s, Yugoslavia was struggling under a heavy debt burden after decades of borrowing from both East and West to drive economic expansion, and a further blow from the oil price shocks of the 1970s. The government introduced strict austerity measures, including fuel rationing. But this wasn’t enough to stop the economy lurching from one crisis to another in the 1980s, a decade characterised by inflation – though hyperinflation didn’t erupt until the end of the decade and in the early 1990s – rising unemployment and falling living standards. This made the richer republics, Slovenia and Croatia, increasingly unwilling to subsidise the poorer ones, sowing the seeds for secession and eventually war. 

Yet Slovenia managed to avoid getting embroiled in the wars that cost thousands of lives and devastated the economies of other post-Yugoslav states as the federation disintegrated. Its war of independence from Yugoslavia, fought between the Slovenian Territorial Defence and the Yugoslav army – the latter weakened as many of its Slovenian members deserted or switched sides, lasted from June 27 to July 7, 1991, ending with the Brioni Agreement brokered by the European Community. 

Three months after the agreement was signed Slovenia became formally independent. Figures compiled by the World Bank for 1991 show that Slovenia’s GDP per capita that year was $6.634, more than $2,000 below that of the poorest EU member state, Portugal, but more than twice as high as in any of the Visegrad states.

Another thing that set Slovenia apart from its peers in the region was the development model chosen at the start of its transition. “Slovenia adopted a gradual model of transition where the state kept its involvement in the economy, while others, notably Poland, adopted shock therapy and put forward lot of market liberalisation reforms that accelerated this process,” says Radu Cracan, economic analyst at the European Bank for Reconstruction and Development (EBRD). 

Already among the strong sectors were food and beverage, automotive, metals, pharma and chemicals. As incomes continued to rise, this stimulated the development of consumer sectors too. Pre-existing commercial links with neighbouring West European countries like Italy and Austria supported the development of export-led growth, an important contributor to the GDP expansion of over 4% a year between 1993 and 2008. At the same time, unemployment declined to just 4.4% between 2004 and 2008. 

“Over the 30 years of Slovenia’s independence, the country established itself as a viable small and open economy with a reasonable good level of international competitiveness,” said Mrak. 

“Slovenia's exports of goods and services account for close to 75% of GDP, confirming that [the] economy is well integrated into global value chains. In my view, Slovenia’s competitive strengths are numerous and some of them are the following: First, favourable geographical location on the north of Adriatic and in the vicinity of European economic centres, such as [the] south of Germany and northern Italy. Second, well-educated labour force including strong R&D and innovation capacities. Though Slovenia is not characterised by a cheap labour force, its good quality to price ratio has become an increasingly important driver for inward foreign investments. Third, well-developed economic as well as social infrastructure contributes its part to the international competitive position of the country. And fourth, well-diversified and preserved nature provides by itself a good basis for tourism as one of the quickest growing economic sectors over the last decade.”

Koper port on Slovenia's Adriatic coast. 

Guardiancich also noted that “despite growing imbalances – Slovenians began to consume larger quantities of foreign goods and services than they could afford, as evidenced by the BoP deficits that emerged after 2003 – Slovenia was a success story.” 

He identifies several reasons for this: the gradual approach to transition, competitive neo-corporatism, namely productive exchanges between workers and managers, and technology-intensive production. 

High human development 

The “Green heart of Europe”, “Europe’s lung”, the “Garden of Europe” are all titles that have been used to describe Slovenia, not to mention seized upon by governments and the tourist board. The country prides itself on its green nature, picturesque scenery, Adriatic coast and high mountains, which has been accompanied by an ethos of outdoor good health – albeit in a country with a high number of smokers – and eco awareness. It has some of Europe’s largest forest cover, and almost half of its territory is protected natural areas. 

Slovenia scores well on most human development indicators. It is the highest-ranked emerging Europe country on the United Nations Development Programme human development index, in 22nd place worldwide, again followed by Czechia and Estonia, and above West European countries such as France, Spain and Italy. 

Life expectancy is also the highest in the emerging Europe region at 81.3 years. There has been no mass emigration, unlike in most emerging European countries, with the population hovering around the 2mn mark for the last three decades, though recent data show a decrease in the Slovene population offset by immigration. 

The OECD’s Better Life Index shows that Slovenia scores well in measures of well-being, performing above average in the job and earnings, housing, health status, social connections, education and skills, work-life balance, environmental quality and personal security categories, even though it is below the OECD average for income and wealth, as well as civic engagement, and subjective well-being. 

Despite this, Slovenians are less satisfied with their lives than the OECD average, says the report. When asked to rate their general satisfaction with life on a scale from 0 to 10, Slovenians gave it a 5.9 grade on average, lower than the OECD average of 6.5.

Slovenia didn’t see a spike in inequality as seen in some post-socialist countries with uncontrolled privatisations that created an oligarch class. Inequality is very low; among the OECD countries, only Slovakia has a lower Gini co-efficient than Slovenia, which is on a par with Czechia. 

Slovenia has one of the lowest Gini coefficients in the OECD. Source: OECD

Boom and bust 

Slovenia overtook Portugal in GDP per capita terms at the start of the 2005-08 boom. It mainly drew ahead because, unlike the other mainly southern European states that accelerated growth in the boom years, Portugal’s economy largely stagnated during the 2000s, and while there was some acceleration between 2005 and 2008 it didn’t see a housing boom like Spain and Ireland or debt-fuelled growth like Greece – or Slovenia. 

Slovenia and Greece are two countries that followed a roughly similar path of boom followed by crisis. However, Greece’s boom was stronger and its subsequent crash was harder. Slovenia’s economy overtook Greece’s in per capita GDP terms in 2012.

This was despite, rather than because of, Slovenia’s own performance. Slovenia too was plunged into a debt crisis along with the international economic crisis. Its strong growth in the boom years of 2005-2008 had been mainly financed by debt, as the stock market was still relatively young. When the crisis hit, Slovenia made an initial recovery but this was only the start of its double-dip recession, as GDP dropped again in 2012 and 2013. Companies went bankrupt and banks were faced with growing burdens of non-performing loans. Major banks had to be bailed out by the government in 2013. 

Overall, Slovenia recorded “probably the largest cumulative fall in real GDP in the euro area, except in Greece”, said Guardiancich. He says that while the reasons behind this are complex, it is mainly down to the only partial reforms, as interest groups opposed the full liberalisation of the economy: “In Slovenia this implied very cosy relationships between managers of non-privatised state-owned enterprises and the three major Slovenian banks (NLB, NKBM, Abanka), which extended massive unsustainable credits before the global financial crisis. Apart from this peculiarity the crisis was a private debt crisis as in the rest of the EU periphery, which brought Slovenia inches away from asking for an international bailout.”

The crisis had long-term implications even though Slovenia’s growth rebounded. “The turning point for Slovenia was the global financial crisis. Before that Slovenia – as [were] all the countries in the region – was growing at a fast pace, productivity was growing and FDI inflows were high so the economy was doing well. The crisis in 2009, its negative effects exacerbated by the banking crisis in Slovenia, caused an economic stagnation that lasted longer than in other countries in the region,” says Cracan. 

The Institute of Macroeconomic Analysis and Development of the Republic of Slovenia (IMAD) also points out in its 2019 development report that Slovenia stopped gaining on other EU countries after the crisis. Although the gap between Slovenia’s GDP per capita started to narrow from 2016, by 2019 it was still wider than before the crisis, said a report from IMAD. 

The report also noted that despite certain improvements of Slovenia’s competitive position, “given the relatively low investment rate in the years of growth, productivity gains have been slower than in the pre-crisis period and insufficient to bridge the considerable gap to more developed countries”. 

Meanwhile, Mrak looks back to long before the last crisis to see why other counties from the region have achieved stronger economic growth than Slovenia, thereby reducing the development gap. These include factors such as the mode of privatisation in the 1990s, even though at the time it gave Slovenia a softer transition than, for example, Poland. 

“At the time of the dissolution of former Yugoslavia, the newly born Slovenia found itself without its traditional “domestic markets” on the territory of the former common state. Next, Slovenia was a part of the bankrupt former Yugoslavia, so it took us several years to normalise our relationship with creditors. Slovenia established a normal access to international financial markets only in 1996, i.e., much later that many others in the region,” he says. “Another specific reason for sub-optimal economic performance was also our specific features of the privatisation in 1990s. In contrast to most transition economies, we opted a decentralised, voucher privatisation that had de-facto become an impediment to foreign direct investment [FDI]. And finally, there was the global financial crisis that due to specific features of its banking sector hit Slovenia more than most other countries in the region.”

Then came the coronavirus (COVID-19) pandemic. Slovenia suffered a severe wave of infections in autumn 2020, and the country of 2mn people has reported over 191,000 coronavirus cases to date, and its economy contracted by an estimated 7.1% last year.

Challenges ahead  

Still, the European Commission forecasts Slovenia will do better than the eurozone average as it recovers from the crisis, with projected 4.7% growth in 2021 and 5.2% in 2022. Ironically, this will put Slovenia back on its convergence path with the eurozone in the next few years as it will grow faster than the averages for both the eurozone and the EU as a whole.

Compared to the international economic crisis a decade ago, Slovenia’s financial sector is in a much better state, which should help the economy to rebound post crisis. On top of that, Slovenia will benefit from the €1.8 trillion EU budget and recovery fund; while it won’t get as much funding in proportion to the size of its economy as the less affluent Southeast European countries, this will still be a significant source of income. Ljubljana has indicated it is keen to direct the money into digitalisation and the green transition, which should put the country on a stronger footing for the future.

Measures of competitiveness, labour productivity, R&D spending and innovation show very clearly there are three frontrunners from the emerging Europe region – Czechia, Estonia and Slovenia – putting these countries in a relatively strong position once the pandemic abates. 

The World Economic Forum’s 2019 Global Competitiveness Report ranks Slovenia slightly below its two main rivals from the region, but it still performs particularly well on macroeconomic stability, health and infrastructure.

On the Global Innovation Index co-published by Cornell University, INSEAD and the World Intellectual Property Organization (WIPO), Slovenia is again behind Estonia and Czechia. So far Slovenia has one tech unicorn – entertainment company Outfit7, the creator of Talking Tom and Friends, that was sold for $1bn in 2017 – to Estonia’s four. Slovenia is behind most of Western Europe but ahead of all the new EU members except Czechia when it comes to labour productivity. As a percentage of GDP it spends more on R&D than any of the eastern EU members and is ranked tenth overall across the union.

Development across sectors has been somewhat uneven. Labour productivity continued to rise in the automotive and pharma segments, the main drivers of the country’s manufacturing sector, but performance was less strong in other parts of the economy. In the last few years, R&D spending as a share of GDP has fallen slightly below the EU average, though it remains ahead of other countries in the eastern part of the bloc. 

“The trends in research and development and innovation, which should form the bedrock of sustainable productivity growth, have been mostly unfavourable,” the IMAD report said. “Creation of new companies, which represent the potential for the transfer of know-how and innovation into practice, picked up but remains low by international standards. Since productivity is a key long-term factor determining economic development and living standards, in particular against the backdrop of demographic change, systematic investments in the strengthening of innovation capacity and digitalisation represent a key development challenge for Slovenia.”

Moreover, as pointed out by the EBRD’s Cracan, “State involvement in the economy is still quite high. This state involvement, especially in the financial sector before some privatisation two years ago, is perceived as detrimental to a more productive allocation of resources in the economy and affects the dynamism of the private sector.” 

He adds that Slovenia’s small size was also a problem when it came to the development of the capital market: “The EBRD has been engaged in developing the financial sector, which lags behind advanced EU markets, especially the capital markets. This didn’t allow for investments in more innovative but riskier firms. In general, it’s a challenge for the small countries in the region to develop their capital markets.” 

On the other hand, to continue to converge with the western EU members and to stop fellow eastern EU members drawing ahead, Slovenia has some serious issues to tackle in its labour market that in the long term threaten to act as a constraint on growth. 

“The premises are there for convergence in future, but rely on addressing existing gaps. Probably the main challenge going forward is the labour market. Access to labour and availably of employment is likely to decrease in the future, as demographics do not allow for a higher employment rate. This builds the case for a focus on increasing productivity and enhancing skills, among others,” says Cracan. Linked to that is the ageing population that is expected to increasingly burden the public finances, social care and pension system.”

The lakeside resort of Bled.