Mrak/Rojec/Silva-Jáur lovenia’s achievements over the past several years Slovenia have been remarkable. Thirteen years after Public Disclosure Authorized independence from the former Socialist Federative egui Republic of Yugoslavia, the country is among the most advanced of all the transition economies in Central and Eastern Europe and a leading candidate for accession to the European Union Sin May 2004. Remarkably, however, very little has been published Slovenia documenting this historic transition. Fr om Y In the only book of its kind, the contributors—many of them the architects of Slovenia’s current transformation—analyze the country’s three-fold ugoslavia to the Eur transition from a socialist to a market economy, from a regionally based to a national economy, and from being a part of the Socialist Federative Republic of Yugoslavia to being an independent state and a member of the European Union (EU). With chapters from Slovenia’s president, a former vice prime minister, Public Disclosure Authorized the current and previous ministers of finance, the minister of European affairs, the current and former governors of the Bank of Slovenia, as well as from leading development scholars in Slovenia and abroad, this unique opean Union collection synthesizes Slovenia’s recent socioeconomic and political history and assesses the challenges ahead. Contributors discuss the Slovenian style of socioeconomic transformation, analyze Slovenia’s quest for EU membership, and place Slovenia’s transition within the context of the broader transition process taking place in Central and Eastern Europe. Of interest to development practitioners and to students and scholars of the region, Slovenia: From Yugoslavia to the European Union is a From Yugoslavia comprehensive and illuminating study of one country’s path to political and economic independence. Public Disclosure Authorized to the European Union Editors Mojmir Mrak, Matija Rojec, and Carlos Silva-Jáuregui ™xHSKIMBy357187zv,:&:(:,:) ISBN 0-8213-5718-2 Public Disclosure Authorized Slovenia From Yugoslavia to the European Union Editors Mojmir Mrak, Matija Rojec, and Carlos Silva-Jáuregui Washington, D.C. © 2004 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail [email protected] All rights reserved. The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank con- cerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street, NW, Washington, DC 20433, USA; fax 202-522-2422; e-mail [email protected]. Cover photo: Dunja Wedam Library of Congress Cataloging-in-Publication Data Slovenia: from Yugoslavia to the European Union / edited by Mojmir Mrak, Matija Rojec, Carlos Silva-Jáuregui. p. cm. Includes bibliographical references and index. ISBN 0-8213-5718-2 1. Slovenia—Economic policy. 2. Slovenia—Economic conditions. 3. European Union—Slovenia. I. Mrak, Mojmir. II. Rojec, Matija. III. Silva-Jáuregui, Carlos. IV. World Bank. HC406.S555 2004 330.94973—dc22 2003066135 Contents Foreword ix Preface and Acknowledgments xi Acronyms and Abbreviations xv Overview: Slovenia’s Threefold Transition xix Part I The Road toward Political and Economic Independence 1 Chapter 1 The Political Reasons for the Dissolution of SFR Yugoslavia 3 Janez Drnovˇsek Chapter 2 Socialism and the Disintegration of SFR Yugoslavia 15 Vladimir Gligorov Chapter 3 Independence and Integration into the International Community: A Window of Opportunity 32 Bojko Buˇcar Chapter 4 Institutional Setting for the New Independent State 53 Neven Borak and Bistra Borak Chapter 5 Transition to a National and a Market Economy: A Gradualist Approach 67 Joˇze Mencinger Chapter 6 Establishing Monetary Sovereignty 83 Andrej Rant iv Contents Chapter 7 Succession Issues in Allocating the External Debt of SFR Yugoslavia and Achieving Slovenia’s Financial Independence 99 Mojmir Mrak and France Arhar Part II Socioeconomic Transformation— The Slovenian Way 113 Chapter 8 Macroeconomic Stabilization and Sustainable Growth 115 Carlos Silva-Jáuregui Chapter 9 Trade Policy in the Transition Process 132 Boris Majcen and Bartlomiej Kaminski Chapter 10 Monetary System and Monetary Policy 150 Ivan Ribnikar and Tomaˇz Koˇsak Chapter 11 Exchange Rate Policy and Management of Capital Flows 170 Velimir Bole Chapter 12 Fiscal Policy and Public Finance Reforms 189 Milan M. Cvikl and Mitja Gaspari Chapter 13 Building an Institutional Framework for a 208 Full-Fledged Market Economy Rasto Ovin and Boˇstjan Kramberger Chapter 14 Privatization, Restructuring, and Corporate Governance of the Enterprise Sector 224 Marko Simoneti, Matija Rojec, and Aleksandra Gregoriˇc Chapter 15 Enterprise Restructuring in the First Decade of Independence 244 Polona Domadenik and Janez Praˇsnikar Chapter 16 The Banking Sector 263 Franjo Stiblarˇ and Marko Voljˇc Chapter 17 Capital Market Development 276 DuˇsanMramor and Boˇzo Jaˇsoviˇc Chapter 18 Labor Market Developments in the 1990s 292 Milan Vodopivec Contents v Chapter 19 Social Sector Developments 315 Tine Stanovnik Chapter 20 Reentering the Markets of the Former Yugoslavia 334 Joˇze P. Damijan Part III The Quest for EU Membership 351 Chapter 21 EU Membership: Rationale, Costs, and Benefits 353 András Inotai and Peter Stanovnik Chapter 22 Slovenia’s Road to Membership in the European Union 367 Janez Potoˇcnik and Jaime Garcia Lombardero Chapter 23 Size Matters in the European Union: Searching for Balance between Formal and Actual Equality 381 Zlatko Sabiˇˇ c, Marjan Svetliˇciˇc, Dorota Pyszna-Nigge, and Wolfgang Wessels Chapter 24 Political Economy of Slovenia’s Transition 399 Janez Suˇˇ sterˇsiˇc About the Editors 413 Contributors 417 Index 421 Figures Figure 8.1 Real GDP in EU Accession Countries 118 Figure 8.2 Inflation Rate, 1987–96 119 Figure 8.3 Inflation Rate, 1997–2003 120 Figure 8.4 Inflation in EU Accession Countries, 2002 121 Figure 8.5 Current Account Balance 122 Figure 8.6 Inward Foreign Direct Investment 123 Figure 8.7 External Debt in EU Accession Countries, 2002 124 Figure 8.8 Unemployment Rate 125 Figure 8.9 General Government Fiscal Balance 127 Figure 8.10 Fiscal Balance in Selected EU Accession Countries and the European Union, 2002 128 Figure 8.11 EU Accession Countries and Maastricht Parameters, 2002 129 Figure 10.1 Structural Position of the Money Market and Net Foreign Currency Assets of the Central Bank 154 vi Contents Figure 10.2 Structural Position of the Money Market, Required Reserves, and Net Liquidity Supply via Monetary Policy Instruments 155 Figure 10.3 Relationship of Change in Central Bank Bills Outstanding to Necessary Purchases or Sales of Foreign Exchange 167 Figure 11.1 Monetization on the Retail Foreign Exchange Market 175 Figure 11.2 Base Money and Central Bank Credits 178 Figure 11.3 Net Foreign Assets of the Central Bank 181 Figure 11.4 Difference in Expected Rates of Return on Domestic and Foreign Credits 182 Figure 12.1 Composition of General Government Expenditure 194 Figure 12.2 Composition of General Government Revenue 196 Figure 12.3 General Government Debt 198 Figure 12.4 Guarantees for Public Sector Entities 199 Figure 14.1 Ownership Structure of Privatized Companies at the Time of Completed Privatization and at End 2002 231 Figure 15.1 Ownership Structure in a Sample of Large and Medium-Size Privatized Firms, 1996–2000 251 Figure 15.2 Characteristics of Top Management in a Sample of Large and Medium-Size Privatized Firms, 1996–2000 253 Figure 18.1 Wages and Employment, 1990–2001 297 Figure 18.2 Worker Flows, 1990–2001 302 Figure 18.3 Job Creation and Destruction, 1990–2001 305 Figure 18.4 Returns to Education and Work Experience, 1987–2001 307 Figure 19.1 Employment, Unemployment, and Pension Recipients, 1990–2001 317 Figure 20.1 Trends in Slovenian Outward FDI, 1994–2001 342 Tables Table 1 Main Macroeconomic Indicators of Slovenia, 1991–2005 xxvi Table 2 Timetable of Major Components of Main Reforms xxx Table 2.1 Gross Social Product per Capita in SFR Yugoslavia 27 Table 2.2 Exports of Goods in SFR Yugoslavia 28 Table 5.1 Selected Indicators of the Slovenian Economy at Independence 73 Table 5.2 Structure of Sales and Purchases of the Slovenian Economy, 1990 74 Table 6.1 Balance Sheet of the National Bank of Yugoslavia, December 31, 1990 89 Table 6.2 Balance Sheet of the National Bank of Yugoslavia and the System of National Banks, December 31, 1990 90 Contents vii Table 7.1 Medium-