International Business : Once-Battered Slovenia Emerges to Join the Western Economy

ISSUE: Since breaking from Yugoslavia in 1991, the tiny nation of Slovenia--which was the Balkan federation’s economic locomotive--has been battered by a dizzying succession of crises that caused its gross national product to shrink almost 20%.

But industry leaders and financial analysts say the bad times have bottomed out. Slovenia has reoriented exports to Western markets, and most indicators for 1993 point to recovery after a two-year tailspin.

If the conversion from public to private ownership can be completed successfully--a big if, critics say--Slovenia could become the first former communist country to be fully integrated into the economic networks of Western Europe.

BACKGROUND: A Western work ethic and Teutonic orderliness instilled during the era of Austro-Hungarian rule helped make Slovenia the most productive republic of Yugoslavia.

While accounting for only 8% of the population, Slovenia contributed 25% of Yugoslavia’s GNP and more than 35% of hard-currency exports. Slovenes also enjoyed the highest living standards, with per capita income at $6,000 per year, above some European Union countries.

But the emergence of Serbian nationalism spurred Slovenia’s secession in June, 1991.

A Yugoslav federal army attack was repulsed by the fledgling Slovenian forces within 10 days, but it shattered the nation’s image as a serene, stable corner of the roiling Balkans. Continuing hostilities in Croatia and Bosnia-Herzegovina, as well as United Nations sanctions imposed on Yugoslavia, shut down Slovenia’s main markets.

And a global recession took its toll on trade with everywhere else.

As sales plummeted, unemployment shot up to more than 10%. Inflation also soared two years ago to an annual rate of 1,000% when the tolar was introduced to sever Slovenia from Yugoslavia’s monetary system.

In 1992, private consumption dropped more than 7%, GNP shrank 6% on top of a 1991 contraction of 9%, and investment plummeted 20%.

OUTLOOK: The hardships it has experienced has forced belt-tightening and restructuring in Slovenia. This has paid off by making Slovenian light-manufacturing enterprises more efficient. Most firms have cut their work forces and operating costs more than enough to compensate for lower sales, which are now picking up.

Sales to countries outside the former Yugoslavia now account for more than 80% of exports.

Slovenia has signed cooperation agreements with the European Union and the European Free Trade Assn. and has earned the confidence of lending agencies.

The three-year growth trend in unemployment began to reverse itself in 1993, and new jobs are expected to be offered in some of the most swiftly recovering industries, such as wooden furniture making, printing and publishing, textiles and tourism. Inflation is down to 1% per month, or about 20% a year--high by Western standards but among the lowest in Eastern Europe and still falling.

GNP was flat for 1993 after three losing years, but modest growth is expected for the next two years. Improved exports over the past year boosted hard currency reserves, allowing easy servicing of a $1.7-billion foreign debt.

One negative: Slovenia remains burdened by some antiquated heavy industries, such as steelmaking, which economists say should have been closed before privatization began. Losing enterprises are likely to be a drag on the development fund to which shares left over from public offerings are to be allotted.

STRATEGY: Slovenia’s small size--just under 2 million people--is one of its biggest advantages. “Even if we increase exports to Germany by 50%, this is such a small part of a big market that no one is going to worry too much” and impose trade protections, says economist Joze Mencinger, a former finance minister.

One issue of concern to potential investors is the unresolved distribution of $3 billion in loans to the former Yugoslavia. Commercial lenders have been pushing for Slovenia to shoulder the entire burden, as it is the only Yugoslav successor state paying its debts. But Ljubljana officials reject a formula that, in effect, punishes its success, and they are still negotiating.

While an unfavorable allotment of that debt could scuttle Slovenia’s improvement trend, other factors make Slovenian companies potentially attractive.

Wages remain low--an average of $400 a month--and workers are more disciplined than many Eastern Europeans. A collective agreement reached between employers and employees in July has helped avoid strikes by taking workers into psychological partnership with management, keeping them abreast of hard realities faced by their enterprises and motivated by the potential for profits many will share in as a consequence of privatization.