Slovenia had been having an easy ride. It largely escaped the violence that followed the breaking up of the former Yugoslavia, and emerged as an independent, organized and relatively wealthy country. Its economy had purred along at solid rates of growth each year since 1993 and it entered the EU in 2004, followed by the eurozone in 2007. Upon joining the bloc, many asked why it had not joined earlier.

Then came the financial crisis, and for the first time in more than a decade, Slovenia found itself in the toughest economic situation it had been in since independence. Its politicians are saying that the country’s economy needs “severe restructuring”, meaning a looser job market, less red tape and more foreign investment.

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Slovenia’s straight-talking economy minister, Darja Radic, is blunt about what the country needs. She says it is regrettable that the country did not take advantage of what had been a thriving economy and adds that Slovenia was not prepared at all for the financial crisis.

Oddly, the country did not have a large financial industry or real estate bubble, yet it was badly hurt in the crisis, with GDP declining by 7.8% in 2009 according to the World Bank. Unemployment at nearly 8% is at its highest level since independence after reaching a low of close to 4% as recently as 2008. It appeared that the country’s main weakness was that it was overly reliant on Europe, particularly its neighbouring countries, Italy and Austria.

Ms Radic says: “We have to invest in the restructuring of our economy. And our measures to support the Slovenian economy are directed to do this. We want to promote innovation and facilitate the business process. I think we are behind the most developed countries in this regard.”

Action plan for recovery

As such, she has set out several plans for the remainder of her term. Funds have been set aside for local entrepreneurs in an effort to develop local businesses and stimulate domestic growth.

However, her main project is to increase Slovenia’s competitiveness. She believes that the economy is far too rigid when it comes to allowing foreign investment and the ease of doing business. Not quiet a Thatcherite, she believes Slovenia’s economy must become more international and reform its tax policy.

She describes the country’s economy as dated, with a job market where it is close to impossible to terminate an employee (worse, she says, than Italy or France), and a situation where the government owns too many companies. As an example, Ms Radic points to a shoe factory owned and managed by the country. While she describes herself as a “big fan” of privatisation, she also believes that certain companies and sectors of the country, such as the energy and telecom space, should remain in the hands of the state.

The government appears to be acting on these proposals, with decrees and amendments recently adopted by the country’s parliament to motivate foreign investors. The new laws will go as far as offering subsidies to foreign direct investors. Smaller investors, less than €2m, will have tenders they can apply for and can obtain a financial subsidy.

A special measure was added for larger investors, more than €12m, whereby they do not have to apply to public tenders. These investors will work directly with the economy ministry and a panel of ministers, which will determine if the investment will proceed or not.

Ms Radic emphasises that for these projects, the number of jobs created is very important to getting approval from the ministers. She also says preference is given to those investing in the high-tech sector. The government does not want Slovenia to be seen as a cheap labor and low-cost option for companies, but rather as a hub for specialist and higher-value sectors. These include IT and technology, automotive, energy and tourism. 

Demographic realities

For a country of only 2 million people, Slovenia is never going to be a major market or have a domestic market that the multinationals will identify as a prime target for expansion. This is something that its politicians and people recognise, but they do not see it as a problem. Rather they believe that the high living standards and quality of life and services will make the country an interesting venture for companies. Furthermore, it sees advantages in its position as a bridge between eastern and western Europe.

Mayor of Ljubljana Zoran Jankovic is acutely aware of his city’s size. With a population of about 300,000, the capital city is embarking on a similar track to that detailed by the economy ministry. Slouching in a chair at his office, the genial mayor who walks into the town’s main square each Tuesday afternoon to field questions from his citizens, denies that Slovenia has traditionally been closed to foreign investors, rather he feels the country has been overlooked because of its size.

Challenges ahead

However, Mr Jankovic does admit that with a tougher economic climate, foreign investment will be more important.

He says: “All these foreign investors, when they are looking at future investments they look at the potential market and the number of citizens. So a lot of them look at places such as Poland, with large populations. So we will have to work hard to attract greenfield investments here.”

Mr Jankovic is searching for investment in similar sectors to Ms Radic, again emphasising that Slovenia is not a place for cheap labour. It is a prudent point. While Slovenia is slightly cheaper for labour than Austria and Italy, it is hardly on par with other eastern European nations, particularly compared to the former Yugoslavian countries.

Slovenia’s economy is forecast to return to growth in 2011, after it is expected to produce a GDP of close to zero for 2010. FDI looks to be a major part of this growth, and the government seems to determine to make sure that foreign investment will create jobs and trickle down benefits to the population.

However, getting the foreign investors to come will be another matter. There remains a great deal of structural issues that investors will want resolved before contemplating an expansion in Slovenia. This year looks likely to be a critical one for the country’s economic future.