SLOVENIA’S TRANSITION SLOVENIA’S TRANSITION CONTENts PREFACE vii 1 BEFORE THE NATION STATE (SIXTH CENTURY TO 1991) 1 2 TRANSITION AND ECONOMIC DEVELOPMENT IN SLOVENIA: THE FIRst DECADE OF INDEPENDENCE 25 3 THE TRANSFORMATION OF INSTITUTIONS: THE DEVELOPMENT OF CORPORATISM IN SLOVENIA 43 4 MONETARY AND EXCHANGE RATE POLICY DURING SLOVENIA’S TRANSITION 59 5 LABOR AND THE TRANSITION PART I: UNIONS AND THE EVOLUTION OF A NEW INDUSTRIAL RELATIONS 77 6 LABOR AND THE TRANSITION PART II 109 7 THE POLITICAL ECONOMY OF THE SLOVENIAN TRANSITION: 1945–2004 145 8 POLITICAL CHANGE AND FISCAL POLICY: THE ROLE OF THE BUDGET IN THE SLOVENIAN TRANSITION 161 9 SLOVENIA AND THE EU: THE ACCESSION 169 AFTERWORD: SLOVENIA IN THE EU 185 REFERENCES 207 INDEX 213 ON THE AUTHORS 215 v PREFACE When I first arrived in 1986 in Ljubljana, Slovenia, at that time still a republic of the Yugoslav Federation, I was on a research sabbatical studying regional devel- opment policy under the country’s unique system of self-management. On this first of what became annual visits for over two decades, I managed to tour most of the country and meet with economic planners and researchers in many of the republics of the federation. My office, however, was located in the Centre for the Theory and Practice of Yugoslav Self-Management, Edvard Kardelj, a research institution that was associated with the Faculty of Social Science of the Univer- sity of Ljubljana. It was there that I met up with Bogomil Ferfila, a professor of political science at the faculty. Thus began a two-decades-long teaching, research, and writing collaboration from which this book originated. At the time of this first visit, Yugoslavia was beset by economic problems including moderately high inflation and a stagnant economy, but we had little premonition that we were about to witness the disintegration of the country. In- deed, we even published an article expressing our confidence that the Yugoslav Federation would prevail despite its tribulations. Looking back on it now, it is obvious that we overlooked the momentum building to dismember the country not only from outside intervention but also from within the federation itself, in- cluding Slovenia. We tackled the national economic and political contradictions behind the collapse of Yugoslavia in our first monograph on the subject,The Rise and Fall of the Third Way: Yugoslavia 1945–1991, but, of course, this was but a prelude to the conflict and transformations in the various regions of the former Yugoslavia in the following decade and a half. Given the wars, the political disintegration, and the abandonment of socialist self-management throughout the former Yugoslav Federation, further pursuit of my original research agenda was, of course, futile and pointless. But by this time I was lecturing at the faculty on an irregular basis and involved with Professor Ferfila in doing research and writing on thetransition in the political economy of Slovenia from socialist self-management to a capitalist market economy within the context of increasing integration with Western Europe. We had the advantage of living through the process and recording the annual manifestations of the insti- tutional and material changes that marked the transformation and, indeed, we had the further advantage of being able to monitor and to conduct ongoing research on the very processes of that change as it occurred. Slovenia, as a national unit, began the transition from a relatively advanta- geous position. By the late 1980s it was, by most measures, a developed, industrial- ized country with an educated labor force and a well-developed social security and vii viii PREFACE health care system. Poverty and unemployment were minimal and, for a large part of the formal economy, a functioning market system existed though not without considerable state regulation and intervention. It was not a “low wage” economy nor was it beset by widescale corruption. Though the political system retained ele- ments of the communist one-party state structure, the Communist Party itself was fractured and disunified and within the self-management political and economic administrative structure, political power was widely decentralized and open to dem- ocratic involvement. In any case, there were few remnants of a totalitarian state in evidence. All of these factors boded well for the transition Slovenia was about to embark on even before independence was declared in June 1991. Nevertheless, Slovenia’s declaration of independence and the subsequent civil wars that roiled most of the rest of Yugoslavia had an immediate depress- ing impact on the new country’s economy, primarily as a result of the loss of its preferential market in the former Yugoslavia, exacerbated by the contraction of its tourist and transit industries due, in large measure, to unfounded foreign perceptions of political instability and potential hostilities in the new republic. Recovery was initially inhibited by the political debate within Slovenia over the path and policies of economic transformation, the settlement of which debate was a necessary precondition of the development of a coherent body of transition policies. The debate was between the political “right,” which championed the “shock therapy” policies advocated by the American economist Jeffrey Sachs, the International Monetary Found, and many western-trained Slovenian econo- mists, and consistent with the “Washington Consensus,” and the “left,” led by the reformed communists (by and large, social democrats), which advocated a “go-slow,” reformist policy. The issue was largely settled by 1992 in favor of the moderate, reformist, social democratic position, though the debate has continued to this day. The debate has continued despite the obvious success of the Slovenian tran- sition, successful particularly when compared with the disastrous effects of the shock therapy, Washington consensus approach in countries such as Russia and many of the other Eastern and Central European transitional economies. In his book Globalization and Its Discontents, economics aureate Joseph Stiglitz makes this point several times. He writes: Seldom has the gap between expectations and reality been greater than in the case of the transition from communism to the market. The combination of priva- tization, liberalization, and decentralizations was supposed to lead quickly, after perhaps a short transition recession, to a vast increase in production. These expectations for economic growth were not realized, not only in Russia but in most of the economies in transition. Only a few of the former Communist countries—such as Poland, Hungary, Slovenia, and Slovakia— have a GDP equal to that of a decade ago. For the rest, the magnitudes of the decline in incomes are so large that they are hard to fathom. [151] PREFACE ix Stiglitz goes on to say that Slovenia, along with Hungary and Poland, “have shown that gradualist policies lead to less pain in the short run, greater social and political stability, and faster growth in the long run.” [188] Stiglitz wrote this in 2002 but there are still those critics who would argue that his judgment was premature and that Slovenia’s refusal to implement a neo- liberal political-economic agenda would lead, in the longer run, to a deteriorat- ing economic performance relative to those countries that adopted the neoliberal shock therapy The evidence that we present in this book, which continues the story well into 2007, however, supports Stiglitz’s conclusion and continues to confound the critics. More recent statistics into 2008 are even more indicative of the robustness of the Slovenian economy. The real economic growth rate for 2007 and projected through 2009 averages almost 5 percent, more than double the growth rates projected for the Euro area, Germany, or the United States. [Slov- enian Economic Mirror, January 2008] What the reformist Slovenian authorities took seriously was the adaption and rebuilding of economic institutions taking as their base the previously prevailing institutions. Nowhere was this more in evidence than in the modification of the worker self-management structure of the labor market and the introduction of a corporatist decision-making institutional apparatus at both the macro and micro level, thereby allowing the revivified unions to play an important role in thetran - sition while protecting the income levels of the majority of the working people. At the same time, the government and the central bank adopted a “post-Keynesian” monetary and fiscal approach to macroeconomic policy, eschewing the simple- minded monetarist approach of the Washington consensus and focusing on the primacy of macroeconomic outcomes rather than on micro markets. This is the case we make in the following pages. Our approach is best described as “institutional,” or as it is sometimes de- scribed, as “story telling.” That is, we start by describing what actually happened and report the policy goals and tools of the authorities as they, themselves, articu- lated them. The story is well supported by the statistical record as compiled by the Slovenian statistical agency (SORS), the Bank of Slovenia, and the Institute of Macroeconomics Analysis and Development (IMAD) and corroborated by the EU and other European statistical agencies. The conclusions that we draw, as summarized above, are derived from the actual experience of the Slovenian tran- sition outlined in the following narrative. As always in putting together a book of this complexity, we owe a great deal to our colleagues in Slovenia, not only those in the universities and research organizations, but also those in the business and financial sectors and in the sta- tistical and government agencies who provided so much of the material used to tell the story of the transition. Nevertheless, we would be remiss not to recognize the contribution of a few whose own work was particularly influential in inform- ing our story. Several colleagues at the Faculty of Social Science from whom we derived much information and insight deserve special mention.