Chapter 1. Restoring a sustainable growth path within the monetary union
Slovenia achieved strong economic growth leading to a marked catch up with the EU15 during the last decade. This dynamic growth has been interrupted by the global recession, adversely affecting Slovenian exports and banks’ refinancing possibilities. Government policies to counter the downturn have been appropriate: most measures to support banks are well-designed and, given the relatively favourable fiscal position, there was room for the discretionary fiscal stimulus adopted by the government. However, the government should ensure that the fiscal stimulus remains temporary and pro-growth oriented. Looking forward, fiscal policy needs to pay greater attention to the monetary conditions (now set at the euro area level) to avoid overheating. As the economy recovers, efforts to achieve real convergence need to be renewed. Labour productivity gains that had been driving growth per capita need to be sustained through higher total factor productivity growth and better labour utilisation. Competitiveness within the euro area should be maintained by ensuring that wage growth does not exceed that of productivity. Overall, the speed of real convergence will largely depend upon implementation of structural policies to promote fiscal sustainability, make employment more attractive and enhance the business environment.
Keeping public finances on a sustainable path and improving efficiency
Slovenia belongs to the group of new EU member countries, which have given a high priority to fiscal prudence. This both stabilised the economy and paved the way for entry to the EU in 2004 and adoption of the euro in 2007. It also created room to counteract the current weakening of the economy. But fiscal policy has to cope with four main challenges: i) ensuring a return to fiscal consolidation after the current economic downturn; ii) achieving longer-term fiscal sustainability by continuing pension reform; iii) limiting growth of public spending and improving its quality; and iv) making the tax system less distorting for job creation and growth.
Improving the functioning of the labour market
Labour market outcomes have improved markedly in the past years as the beneficial effects of the economic upswing were reinforced by important structural reforms. With the economy on the verge of a severe economic downturn, it is important to avoid alleviating measures that adversely affect the functioning of the labour market in the long run. Moreover, several structural challenges remain which require further reform efforts. Firstly, to raise labour force participation of the elderly the pension system needs to be reformed by removing incentives for early retirement and facilitating gradual exits from the labour force. Secondly, to increase employment rates of younger age cohorts, the length of tertiary studies needs to be reduced by strengthening incentives for rapid graduation. Moreover, potential negative employment effects associated with the relatively high minimum wage compared to the average wage should be avoided. Thirdly, to combat increasing labour market dualism, employment protection legislation on regular work contracts needs to be eased once the current economic crisis subsides and the preferential treatment of student work should be phased out.
Enhancing the business environment to foster productivity growth
Slovenia’s rapid catch-up process owes much to a favourable business environment. The 2008 level of product market regulation (PMR) index is much lower than in the Czech Republic and Poland, while being closer to the levels noted for neighbouring countries (Austria, Hungary and Italy) or the OECD average. Keener competition since EU accession has set the stage for large numbers of small and medium-sized enterprises to be created. Foreign direct investment (FDI) inflows, though, have remained low, pointing to a sub optimal transfer of best-practice knowledge. In key service sectors (financial services, energy and telecommunication), low contestability linked to state involvement and strong market concentration may have deterred inward FDI.
In this setting, competitive forces in state-controlled services sectors need to be spurred through economic restructuring, improved corporate governance practices and, ultimately, through further privatisation when the economy recovers. A more efficient financial service sector is particularly needed to develop sophisticated financial products for a rapidly ageing population. Furthermore, overall prospects of reduced potential output growth strengthen the call for a comprehensive innovation system to allocate resources to knowledge-intensive sectors. The quality of Slovenia’s future business environment will largely depend upon the success of innovation policies, including the provision of efficient, innovation-oriented support services. The key challenge in this area is the optimisation of collaborative links connecting the research community, the business sector and the State. Evidence suggests that it is the combination of framework conditions rather than a reform in one single area that matters for long-run economic performance.
How to obtain this publication
The complete edition of the Economic Survey of Slovenia is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. A printer-friendly Policy Brief in Slovene (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
Policy Brief v slovenšcini je dostopen tudi v PDF formatu. Povzema oceno in priporocila OECD, ne zajema pa vseh grafov z zgornjih spletnih strani.
For further information please contact the Slovenia Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat's report was prepared by Margit Molnar and Colin Forthun under the supervision of Pierre Beynet. Research assistance was provided by Desney Erb.
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