The relation between strategic orientations and real opportunities for the Slovenian economy after the post-socialist transition period

Citation

Koncõina, M. (2002), "The relation between strategic orientations and real opportunities for the Slovenian economy after the post-socialist transition period", European Business Review, Vol. 14 No. 3. https://doi.org/10.1108/ebr.2002.05414cab.001

The relation between strategic orientations and real opportunities for the Slovenian economy after the post-socialist transition period

The relation between strategic orientations and real opportunities for the Slovenian economy after the post-socialist transition periodKeywords: Organizational restructuring, Privatization, Business strategy, Competitiveness, Investment

Characteristics of factors in the environment

The Slovenian economy is distinguished by having a market of just two million people. Before independence in 1991, Slovenia was the most economically advanced Yugoslav republic. The Yugoslav market counted 22 million consumers and the majority of Slovenian industries (textiles, shoes, steel and metal-working, timber and furniture industries) were oriented towards this domestic market. The Yugoslav government had been very keen to protect its industry from international competition. The loss of such a big market and the change in social, political and economic systems, which all occurred in the same year, came as a drastic business and strategic shock to the entire Slovenian economy, damaging most severely its traditional industries.

In addition to the social and political pressures which resulted from a rapid decline in the number of employees working in industry, the changed economic, market and political environment, coupled with the absence of entrepreneurial values and modern managerial skills, prevented any serious strategic activities aimed at restructuring industry at the very beginning of the transition process. In the early 1990s, the plans to restructure certain industries looked more like political action plans than serious restructuring programmes. In fact, transition in post-socialist states was generally carried out through a transformation of the social and political system and by enforcing political thought patterns also in the economy. It was only at the end of the 1990s that Slovenia first obtained professionally sound restructuring programmes for some industries such as textile, shoe and steel industry, which also received a positive evaluation from the European Commission[1].

In the year 2000, Slovenia's GNP per capita was approximately US$9,900 with economic growth forecast at 4 per cent, placing Slovenia among the most developed and successful candidate states for the accession to the EU. Coupled with an increasingly stable social and political environment, the general development tendencies of the Slovenian economy remain positive. In its negotiations with the EU, Slovenia is the country with the highest number of closed issues.

In spite of positive economic tendencies, there remain certain structural development issues which show that in Slovenia the restructuring of the economy has not yet been completed.

Fundamental development issues

The Government of the Republic of Slovenia has repeatedly stressed that the period of transition and restructuring of the Slovenian economy is now finished. Consequently, provision of state aid shall comply with the Accession Treaty and is only to be allocated in accordance with the provisions of the Amsterdam Treaty. Nevertheless, certain industries exhibit structural discrepancies such as the incomplete privatisation process which is particularly evident in the field of economic infrastructure and the financial sector; and in the slow growth of new companies. Since 1998, the Slovenian economy has used the ''Strategy of the Republic of Slovenia for Accession to the European Union – Economic and Social Part", which was prepared by Governmental institutions, as the main professional and development framework for the preparation of branch strategies and for the implementation of economic policy.

The complexities of development strategy

The question which forms the core of this article is complicated by the inter-dependence of the following issues:

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  the degree to which the Slovenian economy has managed to outgrow its beginners' transition crisis and solve its fundamental development issues;

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  whether the strategic objectives of Slovenian economy revitalization have been realistically defined in view of the present international economic trends;

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  the measures that need to be taken on the government and entrepreneurial level to complete the restructuring of Slovenian economy and increase its international competitiveness.

Main obstacles to development

The main obstacles to the completion of restructuring and privatisation of the entire entrepreneurial sector are the following:

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  Investments are a relatively small proportion of GNP and still not sufficiently oriented towards productive purposes.

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  The problems connected with the completion of the transition period: high real interest rates, excessively high inflation, increasing labour costs, insufficient quality and low efficiency of state administration, high costs of social security and high costs of a small state.

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  Only recently has the economic policy turned from recovery programmes designed for large companies which still dominate the Slovenian economy, towards the development of new companies which could greatly contribute to its international competitiveness.

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  During the entire transition period, a group of loss-making companies were allocated a large proportion of the state aid, which left few funds to be spent on the new, private economic sector.

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  The use of research results to foster economic development and the inclusion of a national development research system to strengthen the international competitiveness of the Slovenian economy remain insufficient; and consequently, the number of widely recognizable Slovenian trademarks is still low.

At the beginning and in the middle of the transition period, new fast-growing companies, "gazelles", which were supposed to contribute greatly to the innovative and export potential of the Slovenian economy and its added value, were faced with the following problems:

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  Lack of mutual connection and co-ordination between different action programmes in the economic policy regulating development of SMEs.

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  Poorly developed financial services for the small enterprise sector, high real interest rates and limited capital resources.

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  Lack of manufacturing and business premises available for rent at reasonable prices (the privatisation process left a number of empty office buildings without an explicit owner and there was an absence of programmes for construction of industrial parks and business incubators).

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  The problems which SMEs face in their inclusion in international markets are typical of the sector and very serious and, consequently, result in unchanged structure of exporters.

Forecast of opportunities at the beginning of transition period

Owing to the above described development obstacles such as the size and high expenses of a small state, problems related to reform and privatisation, and the macroeconomic recovery of the entire economy, international advisory institutes place Slovenia right behind the Czech Republic and Hungary and often after Poland in their forecasts of the success and speed of transition implementation. The forecast prepared by the McKinsey Institute presents some interesting points (see Figure 1).

Development results at the end of transition

The achievements of the transition period are best assessed from the values for the years 2000 and 2001. During the ten years of transition individual environmental factors have been believed to affect, either positively or negatively, the efforts to achieve the main goal of Slovenian economic policy, that is to prepare the majority of Slovenian companies to enter and succeed in highly competitive international markets and to eliminate those parts of economy which are not and never will be able to become internationally competitive. Generally, it can be said that most Slovenian companies are increasingly successful in international markets. However, the development problems of the textile and shoe industries remain unsolved, and further development of those companies within the traditional industries which have survived transition thanks to generous state aid, is strategically insecure.

Figure 1 Forecast of opportunities

The Slovenian Development Agency is a state institution which has played the most prominent role in leading and co-ordinating the restructuring and privatisation process of Slovenian industrial companies. From the point of view of the European Commission, the Agency is considered a "grey zone" as regards the control over the allocation of state aid. The Government of Slovenia has taken the standpoint that the Agency shall cease to exist by the end of 2001. This would be a real and symbolic act of Slovenian politics showing and warning Slovenian companies that in the year 2001 the transition period agreed on the basis of EU Accession Treaty is irrevocably over. It would also mark the end of the restructuring of ex-socialist companies into market competitive companies, based on "generous" state aid, which was often used as a tool to decrease social pressures and not in its strategic and development function.

At the end of transition period various opinions were formed and assessments of the Slovenian economy have been made, describing the factors which obstruct further progress and the achievement of higher competitiveness. In the years 1999 and 2000 the Chamber of Commerce and Industry of Slovenia conducted an opinion poll among Slovenian managers, asking them about the obstructing factors to economic development.

Table I Comparison of ten most negative factors of competitiveness

At the end of 2000, capital price was considered to have the most negative impact on competitiveness. The factors of state administration and regulation remain in second place, as in the year before, implying that the bureaucratic character and low effectiveness of the state administration is a serious issue preventing higher competitiveness in the Slovenian economy. Lower on the scale of negative factors in the year 2000 are taxes and duties. It is interesting that the state industrial policy remains high on the list both in 1999 and in 2000 (see Table I).

What needs to be done in terms of economic policy

When the author of this article presented the state of the Slovenian economy to German economists in the Federal Republic of Germany, they positively assessed the economic achievements and trends in Slovenia, and added that:

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  Labour costs in Slovenia are on the level of Greece, Portugal and Spain, and are too high for improvement industry; the expressed opinion was that those industries and the companies which make their profits from manual labour and not from added value guaranteed by knowledge, advanced technology, modern marketing and implementation of trademarks, lack future development opportunities in international markets.

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  Still over-bureaucratic administration is another serious issue, especially implementation procedures to obtain various documentation (e.g. location documentation procedures), which considerably decreases the interest of potential foreign investors in Slovenia.

The most important strategic tasks which the Slovenian government has already undertaken include reducing bureaucratic administration, the completion of privatization and the liberalization of both the entire financial sector and the economic infrastructure, and a strategic approach to the structuring of both product and service portfolios of the Slovenian economy to make Slovenia competitive in international markets. Also at the end of the transition period, the main Slovenian strategic goals are increased efficiency of administration, strategic consolidation of the entire entrepreneurial sector, open financial and capital markets, and, last but not least, privatised economic infrastructure which would ensure the competitiveness of prices in energy and telecommunications.

Although Slovenia ranks first among transition economies in terms of GNP per capita, and its annual economic growth has been satisfactory, it is still lagging behind the developed EU countries in economic development by approximately 15 to 20 years. According to the same research conducted by the McKinsey Institute, Russia and Ukraine are 40 to 50 years behind, yet the same source places them highest among all transition economies due to their unused potential economic resources.

Consequently, Slovenian will have to pay special attention to increased economic growth which should, according to the McKinsey forecasts, show an annual increase of 7 per cent (provided the economic growth of developed western countries remains the same) for Slovenia to reach the level of developed EU member states in the next two decades. The only way towards this goal is to provide appropriate domestic conditions and a suitable social, political, legal and economic environment for higher direct foreign investment in Slovenia.

Economic policy and the entire entrepreneurial sector should be oriented towards the preparation of programmes profitable both in terms of technology and marketing, which will also enable Slovenian companies to become part of international clusters and, consequently, guarantee higher added value. Without strategic investments from the developed West into the Slovenian economy no real step towards the most advanced Western economies can be expected. And the conclusion to be made at this point is that Slovenia needs direct foreign investment, new strategic business plans and new destinations to international markets.

Miroslav KoncõinaManagement Specialist, Counsellor to the Government of the Republic of Slovenia, Senior Lecturer at College for Entrepreneurship, Ljubljana

Note

1. 1.

   The restructuring programme for the steel industry in Slovenia, which was presented by the author of this article at the European Economic Forum in Brussels in November 2000, was evaluated by the EU Commission and the candidate states as the most thorough and precise.