Transition By Slovenia To A Market Economy example essay topic

In 1991 following a ten day military resistance to the Yugoslav National Army, Slovenia achieved its independence. Since then the country has established itself through economic prosperity and stability that is not always the case for countries transforming from a communist dominated system. During the period that Slovenia was a part of Yugoslavia the government consisted of a socialist system dominated by the communist party with most aspects of political power centered at regional levels. As a part of Yugoslavia Slovenia made up one fifth of its GDP and since its independence it has maintained a consistent GDP growth rate of 4% and has been successful in its transformation to a market dominated system by taking a policy of diversification of trade and an advocate of bilateral and regional free trade agreements. Slovenia is a small country in central Europe. It borders the Adriatic Sea and lies between Austria and Croatia.

Slovenia is slightly smaller than New Jersey and has a population of just over two million people. Its strong historical ties to Western Europe along with many other factors such as a literacy rate of 99.7% have resulted in Slovenia enjoying a much higher per capita GDP than other transitioning economies in Central Europe. The policy change that Slovenia experienced upon its independence involved a change from labor managed enterprises to a privately owned capitalist system. This task involves the privatization of the entire market from a socially owned and planned system. The changes to the labor market that took place were the transformation from wage controls to a competitive labor market. This was not as big of an issue in Slovenia due to the negative influence that labor-managed enterprises had on wage and price controls.

The attempts to distance itself from central planning and the ideal of a functioning labor market is one of the primary reasons that Slovenia has made the transition to a capitalist economy with relative ease. Towards the late 1980's the Yugoslav government recognized the need for economic change in order to prevent stagflation from occurring and to spur production. Actions taken included "liberalizing prices, wages, imports, and personal foreign currency accounts, which together would bring about equilibrium of relative prices". These stabilization policies allowed corporations to act more autonomously and set the stage for the eventual transition to a capitalist economy by Slovenia after its independence. Prior to the Slovene independence in 1991, the Yugoslav economy was based on labor-managed enterprises and basic price and wage controls. In many cases this involved the workers in a corporation electing one third to one half of the members of the board of directors.

This introduces a democratic element to the operation of socialist corporations. The problem with this system is that to maintain socialist economic principles there cannot be an individual owner of the corporation. This presents the problem of ownership and in many cases the government maintains ownership creating soft budget constraints. There is also the problem of defining a socially owned firm. Labor-managed enterprises can somewhat mitigate the lack of motivation associated with pure communist regulate firms because the workers feel like they are working for themselves. The inefficiencies associated with this system come from the lack of free entry for firms which is due to the economic planning system and prevents the market from achieving long run equilibrium.

Although the political system in Yugoslavia was dominated by the Communist Party, certain traditional communist practices such as censorship and emigration restrictions were comparatively mild. The Yugoslavia was faced with rising unemployment in the 1980's and a sense of national crisis created the need for economic reforms during that period. Many firms practiced a self management system by aligning themselves with political parties, giving them an influence in policy-making and negatively affecting price and wage controls that were in effect. During the late 1980's all of the political delegations in Yugoslavia supported a strong central government except Slovenia. This shows the reluctance to comply with the economic controls that restricted the market from functioning efficiently. The government of Yugoslavia made different attempts to spur the economy throughout the late 1970's and early 1980's.

These included restrictive measures such as "wage and price controls, limits on public energy usages, and controls on investment". This created a stop and go policy that based prices and wages on government controls instead of the market equilibrium. Many of these controls, if not reduced later in the decade, could have impeded the transition by Slovenia to a market economy. Before Slovenia gained its independence in 1991 the labor market in Yugoslavia was characterized by high unemployment. This trend began immediately after World War II when four fifths of the working population in Slovenia were peasants. Rural workers were forced into the cities in order to find better jobs and health care.

The two government policies that spurred this movement were "Yugoslavia concentrated investments in heavy industry, directing capital away from agriculture and further impoverishing the peasants. And the policy of discouraging nonfarm private business eliminated a potential alternative economic activity". The focus of government aid and investment away from agricultural activities forced workers into the cities and forced "social sector enterprises to absorb extra labor, even if it meant redundancy and decreases in labor productivity". This created inefficiencies and put pressure on the government and its policy of soft budget constraints when the industries began to fail. Throughout the 1980's Yugoslavia attempted financial reforms that were aimed at reducing the runaway inflation that was prevalent at the time. These policies increased unemployment as they improved labor productivity.

Eventually heath care reforms and pensions created some incentive to draw the unemployed out of the cities and into agricultural industries. Slovenia's independence brought its transition to a capitalist economic system and the privatization of many industries across the nation. The sustained GDP growth rate and the increase in investment spending and trade have created and surge in many industries which have lower unemployment over the past decade. Slovenia's current unemployment rate is 11.2%. This can be compared to Yugoslavia's former unemployment rate of 20%. This proposed a significant problem when dealing with a labor-oriented government based on a socialist full employment concept.

The reason for the lack of ability to correct the unemployment was the social pressure for programs that were aimed at sustaining and raising the minimum standards of living. The transition to a capitalist economic system created the need for efficiency and removed the soft budget constraint that was in place. This increased production while minimizing costs and resulted in the eventual increase in investment spending and increases in the size of many industries. This is the cause of the steady decrease in unemployment in Slovenia over the past ten years. In the late 1980's the Yugoslav financial market was in trouble. Inflation had risen to 118% per year and there were no forecasts for a change, along with industrial production dropping rapidly.

Slovenia had to deal with many of these problems when making the transition to a capitalist system. Its strong ties to Western Europe and its willingness to sign free trade agreements helped to stabilize the new Slovene currency and create a system of trade that eased the transition. In Yugoslavia in the 1980's industry growth was stagnant due to the constraints on labor managed firms. Workers were generally guaranteed job and wage security. When economic downturns occurred the result was "reductions in investment rather than layoffs or reduced wages". In order to reduce wages the firm had to take on long tedious legal procedures and finding alternative employment to keep the workers from becoming unemployed.

In order to curb the expenses on wages many companies shortened the work day. This resulted in a drop in productivity. This system was characterized by a lack of efficiency due to the control that the workers had over firm decision on employment and wages. Industries were prevented from growing due to the inefficiencies that are caused by a lack of equilibrium in the labor market. When Slovenia gained its independence in 1991 and began the transition to a capitalist system they began privatizing many industries. This allowed private owners to make decisions about that the optimal about of labor and capital.

This created much more efficiency across many industries and allowed for growth and increased investment. Industries were also supported by the trade network that Slovenia created with many Western European countries. Slovenia's industry is focused around agriculture, manufactured goods, and machinery and transport equipment. The increase in agriculture is due to policies that Yugoslavia enacted which focused on rural standards of living and health benefits, creating an incentive for unemployed in the cities to more to rural portions of the country. Slovenia has found success in exporting many of these goods through its relationships with several European Union countries. Tourism is becoming more important as an industry in Slovenia as well.

Upon its independence in 1991 Slovenia faced the daunting task of transforming its economic system from labor managed enterprises with publicly owned firms to a capitalist system. This required the privatization of almost every main industry. There have been many factors to Slovenia's success so far in the transformation, however, there are several economic issues that are still being addressed. These include rising inflation and problems between government, business, and central bank policies that could be a result of corruption. These are issues of concern in the upcoming months before Slovenia's scheduled accession to the European Union on 1 May 2004. Slovenia's success in its transformation to a capitalist system can be largely attributed to its relationship with Western European countries and other countries in the EU.

Much of Slovenia's success can also be credited to its willingness to get involved in free trade agreements which have spurred export industries across the country. As a result Slovenia has the one of the highest per capita GDP rates among transitioning countries in Central Europe. Slovenia has established itself as a successful example of the transformation that many countries are making and has experienced prosperity that is all too uncommon among countries in similar situations across the world.