___________________________________________________________________________

Faculty of Arts
Department of Geography

TRANSITION IN ECONOMY OF SLOVENIA AND BIH

Paperwork from Economic geography

Mentor: Prof. Dr. Luka Lober

Student: Naida Brkani

Maribor, November 2016

Contents
Introduction............................................................................................................ 2
THE TRANSITION IN SLOVENIA................................................................................ 4
Slovenia: the only successful case of economic transition.....................................6
ECONOMIC TRANSITION OF BOSNIA.......................................................................8
Three reasons why the economy of Bosnia and Herzegovina is off balance..........9
Conclusion............................................................................................................ 13
References........................................................................................................... 14

Introduction

In this seminar work it will be explained a transition in Slovenia, than transition in Bosnia and
Herzegovina, than in conclusion will be compared these two countries. First we will say
something about of a meaning of transition.
A transition economy or transitional economy is an economy which is changing from
a centrally planned economy to a market economy.Transition economies undergo a set of
structural

transformations

intended

to

develop

market-based

institutions.

These

include economic liberalization, where prices are set by market forces rather than by a central
planning organization. In addition to this trade barriers are removed, there is a push
to privatize state-owned enterprises and resources, state and collectively run enterprises
are restructured as businesses, and a financial sector is created to facilitate macroeconomic
stabilization and the movement of private capital.The process has been applied in China, the
former Soviet Union and Eastern bloc countries of Europeand some Third world countries,
and detailed work has been undertaken on its economic and social effects.
The transition process is usually characterized by the changing and creating of institutions,
particularly private enterprises; changes in the role of the state, thereby, the creation of
fundamentally different governmental institutions and the promotion of private-owned
enterprises, markets and independent financial institutions.[3] In essence, one transition mode
is the functional restructuring of state institutions from being a provider of growth to an
enabler, with the private sector its engine. Another transition mode is change the way that
economy grows and practice mode. The relationships between these two transition modes are
micro and macro, partial and whole. The truly transition economics should include both the
micro transition and macro transition.Due to the different initial conditions during the
emerging process of the transition from planned economics to market economics, countries
uses different transition model. Countries like P.R.China and Vietnam adopted a gradual
transition mode, however Russia and some other East-European countries, such as the former
Socialist Republic of Yugoslavia, used a more aggressive and quicker paced model of
transition.

THE TRANSITION IN SLOVENIA

Slovenia is one of a few countries in the region in which its transition to a market economy
also experienced a change from a regional economy from Yugoslavia to a national economy
from the European Union (EU). Due to its involvement with Yugoslavia, Slovenia was left
with hyperinflation, high foreign debt, and no foreign exchange reserves to secure its new
currency (Mrak, Mojmir, and Janes, 2002). Slovenias transition to a market economy was
possible due to its involvement with the EU. In order to become a full member of the EU,
Slovenia had to design a transformation for quick economic growth to catch up with the
developed European countries. The objective of Slovenias transformation was to increase the
economys competitiveness internationally and design policies that were viable socially and
environmentally. Slovenias policies of stabilization and liberalization have been very
successful. These policies include monetary policy which reduced inflation and interest rates,
fiscal policy which helps maintain stable public finances, incomes policy which generates
stability, and a policy of international economic relations, which opens up the economy to
foreign competition and assimilates Slovenia businesses into the international economy
(Mrak, Mojmir, and Janes, 2002). Slovenia also succeeded in cutting its inflation rate
allowing for Slovenia to regain economic growth in 1993 (Mrak, Mojmir, and Janes, 2002).
One of Slovenias major milestone was the introduction in October 1991 of its new currency,
the Slovenian tolar (Mrak, Mojmir, and Janes, 2002). Due to its new stability and successful
involvement with the EU, Slovenia is able to receive the highest credit rating of all economies
in transition in Eastern Europe. With a 2009 GDP per capita of $23,800, Slovenia has one of
the best economies in Eastern Europe (Economy. 2011).
However, Slovenias economy faces problems today. Inflation rate still remains high from a
developed countries point of view. Since 1996, the inflation rate has remained at eight to ten
percent, due to the price adjustments from administratively-controlled sectors (Mrak, Mojmir,
and Janes, 2002). High interest rates also remain a concern of monetary policy due to strict
monetary policy, inflationary expectations, and the structure of the banking sector.
Furthermore, Slovenias economy is highly dependent on foreign trade, which causes frequent
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changes in its international price competitiveness. Labor costs remaining in tune with
productivity is a key challenge as well. The OECD's Economic Survey of Slovenia 2011
emphasizes the need for pension reform, redistribution of funds accessible for education,
canceling the pay increase in the public sector, making Slovenia open to foreign direct
investment to increase productivity, and rebalance the national economy along with increasing
competitiveness (Economy." 2011).
Nevertheless, since gaining independence, Slovenia market economy has allowed it to be
apart of the EU, a member of the World Trade Organization, Central European Free Trade
Association, while also having free-trade agreements with the European Free Trade
Association and individual countries.

World Bank 2016 (With Slovenias GDP per capita of 23,289.32 in 2013, which is greater
than most countries in the region, proves it has one of the best economies in Eastern Europe
after its economic transformation that defeated its hyperinflation, high foreign debt, and no
foreign exchange reserves to secure its new currency caused from its involvement with
Yugoslavia)

Slovenia: the only successful case of economic transition

One tiny country of two million, Slovenia, however, has already established itself as a
successful, affluent Western nation.It is often taken for granted that transitions from a
centrally planned economy to a market economy in Central and Eastern Europe (CEE) have
been successful. After all, privatization has been completed, often with higher ratios of noncollective ownership than in Western Europe. Economic output, which dropped radically in
the nineties, has bounced back, and the rise in gross domestic product (GDP) in the CEE
region has been faster than in Southern Europe, especially with the crisis severely affecting
the Mediterranean countries. The macro picture looks promising.Yet on the practical micro
level of ordinary citizens it is not an exaggeration to call economic transition an enormous
failure. With the single and gradually diminishing exception of the Czech Republic, the entire
region of the former Soviet Bloc is an employment crisis zone. Unemployment in the region
is higher than in the European Union as a whole, and astonishingly higher than in the
Northwest of Europe. Economic transition based on the inow of foreign direct investment
and multinational enterprises clearly has its limits as far as employment potential is
concerned. The same is true of wages. According to Eurostat data, the average wage level of
Eastern Europe has hardly converged in relative terms to that of Western Europe, and the
difference in absolute numbers has even increased since the beginning of the transition
process. While prices across Europe have by and large converged (some products, such as
clothes and electronics are actually more expensive in Eastern Europe than in the West), after
paying for rent, food and clothing, Western Europeans can now save far more than Eastern
Europeans in comparison to what they could twenty years ago. In fact, very few Eastern
Europeans are able to save anything at all. While the average Western European earned
around 2343 euros gross per hour in 2010, the average Eastern European made no Low
wages and scarce employment mean low revenues for the state, a situation worsened by a
senseless tax competition race to the bottom. Thus to add injury to hurt, low private living
standards are coupled with low public expenditure by incapacitated states. While politicians
seem willing to admit that the global economy is about competition for knowledge and skills,

without investments into education the longer term chances of the region catching up are
growing slimmer and slimmer.

ECONOMIC TRANSITION OF BOSNIA

Due to the war that ensued with the breakdown of Yugoslavia, the start of BosniaHerzegovinas economic transition was focused on reconstruction the war-torn country (OED
2004, 6).

Reconstruction involved the rebuilding of infrastructure and revitalizing the

economy. Despite successes of infrastructure reconstruction, the economy in 1999 only

reached 60 percent of the pre-war status (OED 2004, 3). The World Bank aimed to promote
rapid, full-fledged neoliberal reform within BiH, but the country did not fully embrace this
agenda, maintaining barriers to privatization (OED 2004, xiv). 1999 Marked the start of the
Enterprise and Bank Privatization Credit (EBPAC) to remove these remaining barriers to
privatization, but the Organisation for Economic Co-operation and Development considered
the actions of BiH to be inadequate and slower than expected (OED 2004, 11). The war
destroyed public banks and private banks lacked investment. Because of these weaknesses,
the World Bank sought to create a financial environment for strong privatized banks (OED
2004, 12). Overall, BiH was one of the least responsive countries to the World Banks call for
privatization (OED 2004, 23). Despite the economic stagnation experienced during the
communist regime, there is a clear disadvantage of corruption and lack of domestic initiative
to implement a clear economic strategy for market-driven transition. Toma explains that
privatization began in the 1980s, before the war of 1992 to 1995, but state ownership was a
source of stability during and after the war (2013, 100). The slow process of reform can be
attributed to the lack of commitment by domestic authorities despite the broadly external
international pressures of the EU, World Bank, and NATO (Toma 2013, 103). Issues of
corruption, inequality, and injustice persist in this system (Toma 2013,103). Though this slow
transition is consistent across the Western Balkans, BiH is one of the least progressive cases:
the GDP remains at 80 percent of the 1990 pre-war level. Typically countries reach the pretransition level of GDP within five years of the transitions start (Toma 2013, 104). The
structure of the Dayton Accord is considered a root cause of institutional dysfunction for this
economic transition; there is a great deal of corruption and political disunity that prevented a
clear economic policy for transition to a market economy (Toma 2013, 106). Lack of

economic growth, especially in comparison to other Central European and even Western
Balkan states has been the main consequence of this transitional disadvantage.

Three reasons why the economy of Bosnia and

Herzegovina is off balance
Twenty years after the end of the war, his country of birth is not doing as well as it could.
Bosnia and Herzegovina (BiH) faces acute social and economic challenges. While many of its
people left the country and often succeeded in other parts of Europe, the economy at home is
out of balance and far from approaching European living standards. The country has three
major, mutually reinforcing imbalances that need to be corrected (Figure 1):

Figure 1. Balancing Bosnia and Herzegovina

Source: World Bank, Bosnia and Herzegovina Systematic Country Diagnostics 2015
(forthcoming).

1. A large public sector and limited private wealth creation. BiH has a
disproportionately large public sector, which dates back to Yugoslav times and has
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only been partly reformed since. Public expenditures amount to nearly half of GDP
and, if state-owned enterprises (SOEs) and costs from corruption are added in, the
public sector may be as large as 70 percent of GDP. Thats not much smaller than in
the 1980s! Though public spending is high, it is not pro-poor. For instance, high social
protection spending benefits the wealthy almost as much as the poor. While SOEs
maintain employment (even in some extreme cases when factories no longer operate),
they also generate bills, which ultimately are paid by the taxpayer. In turn, this creates
a negative spiral: taxes are high and biased against employment. A large tax wedge
swallows over a third of even the lowest paid workers salaries, making it almost
impossible for employers to create formal jobs. And employers are hit by the regions
worst business environmentpartly the result of a plethora of regulatory regimes and
a rent-seeking rather than public-service oriented public sector.
2. An economy based on consumption rather than production. During the post-war
economic recovery, BiH did not create new foundations for sustainable economic
growth. Financial inflows and particularly aid and remittancesaveraging around 20
percent of GDPfueled consumption-based economic growth. Today, consumption
remains at over 100 percent of GDP, with only a handful of countries having higher
figures. To sustain high levels of income, create prosperity, and eliminate poverty, BiH
will need to shift toward an economic model built on production of goods and services
rather than consumption.
3. An under-performing export sector. Exports are worth only 30 percent of GDP, one
of the lowest in Europe and a sign of the countrys weak competitiveness. This stems
from the poor business climate, high cost of employment and poor transport
connections (rated as among the worst in Europe for all forms of transport by the
World Economic Forum). If BiH exported as much as it did during Yugoslav times, its
exports would be three times as high. Achieving this today would require firms that
can compete internationally.

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Table 1 and Graph 2 Indicator of economic activity and fallacies

Sources: Transparency International; Worldbank; Central Intelligence Agency; Agency for
Statistics of Bosnia and Herzegovina

Huge amounts of donations stopped to pour into the country in 2001. Tough economic climate
and disputes among incumbents were not factor of encouragement for perspective start-ups or
high unemployment. Table 1 and Graph 2 below show the relations between annual GDP
growths, unemployment rates and corruption perceptions indexes between 2002 and 2011.
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Indicated values, especially certain unemployment rates, cannot be taken as completely

truthful. The third index, given by Transparency International, sets the value upon the
previous two. Bosnia and Herzegovina is evaluated as one of the most corrupted countries in
Europe. The highest value for CPI is 10; as seen in the table, Bosnia has on average value of 3
which puts her in undesirable place for potential investors. Unemployment rates are soaring
from year to year. Taking into account that these are official figures, actual situation might be
even worse. High jumps in GDP growth rates serve more as a delusion as will be shown in the
further analysis.

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Conclusion
Of all the new countries, Slovenia has gone furthest in economic reform during the last two
years. During this time, Slovenia achieved political independence, stabilized its economy,
introduced its own currency, and carried out fundamental economic reforms. Slovenia has
made significant progress in its transition from a socialist to a market economy, despite
difficult circumstances, including civil war and a loss of major markets. Slovenia was more
developed than other countries of Eastern Europe before the transition. Its economy was more
open, prices and imports were relatively free, and the budget was more or less balanced.
Nevertheless, it suffered from high inflation and a lack of monetary and fiscal discipline,
especially at the federal level. By accomplishing successful monetary and fiscal reforms and
macroeconomic stabilization with sharply reduced inflation, Slovenia has proved that it can
manage its macroeconomic affairs better than the former Yugoslavia. But comparing with
Bosnia and Herzegovina, Slovenia has better economical situation. All of the factors analyzed
in previous sections are completely interconnected in creation of real economic situation of
Bosnia and Herzegovina. High unemployment rate, surging inflation (despite the fact that
artificially controlled currency does not produce any of it), as well as discouraging climate for
foreign direct investments - are all consequences of distorted laws and constitution which
keep on serving partial interests of incumbents while inducing uncertainty in the future of
development of Bosnia and Herzegovina. Economy cannot grow virtually as a result of
government spending. Diminishing net exports, investments and consumer spending will not
be empowered to greater extent unless laws for private sector are more thoroughly addressed
and reformed. Government has to encourage entrepreneurship, massive job growth in terms of
more favorable climate for investments and even subsidies for start-ups which look promising
for job creation (high-end manufacturing, for instance). On the other hand, incapability to
have independent monetary policy prevents country to step in with desirable monetary goals
which would provide benefits for the whole economy.

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References
1. Transition to a National and a Market Economy: A Gradualist Approach Joe
Mencinger
2. http://www.hungarianreview.com/article/slovenia_the_only_successful_case
3. https://en.wikipedia.org/wiki/Transition_economy
4. http://exhibits.lafayette.edu/ppc/exhibits/show/economic-transition/economictransition-of-sloveni
5. http://nf.vse.cz/wp-content/uploads/Halilovi%C4%87-Ensar.pdf
6. https://www.brookings.edu/blog/future-development/2015/11/05/three-reasons-whythe-economy-of-bosnia-and-herzegovina-is-off-balance/

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