Analysis, Research and Development ISSN 1581-6907 DEVELOPMENT REPORT 2005 Institute of Macroeconomic Analysis and Development Janez Sustersic, director http://www.aov.si/umar/ Editors in Chief: Ana MURN, Luka ŽAKELJ Translation: Matija VODOPIVEC, Eva HORVAT (Main text), Tina POTRATO (Indicators) Technical Editor, DTP: Ema Bertina KOPITAR Figures: Marjeta Žigman Language Editors: Murray BALES Layout: Sandi RADOVAN, studio DVA Printed by: SOLOS, Ljubljana Circulation: 250 Ljubljana, 2005 © 2005, Urad za makroekonomske analize in razvoj Development Report2005 ^¡¿institute of /^f Macroeconomic Analysis ml! and Development IMAD Development Report 2004 4 Contents Authors: Maja Bed naš (macroeconomic stability), Marjan Hafner (financial sector), Alenka Kajzer (education and training), Maja Kersnik, Dušan Kidrič (social development), Janez Kušar (changes in economic structure), Ivo Lavrač (balanced spatial development), Ana Murn (foreword, balanced economic, social and environmental development, completion of institutional reforms from the transition period, regional development, environmental development), Jure Povšnar (infrastructure), Matija Rojec (improving the business sector's competitiveness), Metka Stare (research, technological development and innovation, information and communication technologies), Janez Sušteršič (improving state efficiency), Mojca Vendramin (environmental development). Authors of indicators: Maja Bednaš (country risk), Andreij A. Chiaiutta (national competitiveness according to the WEF), Marjan Hafner (total assets of banks, insurance premiums, market capitalisation), Jana Javornik (human development index), Slavica Jurančič (unit labour costs, market share), Alenka Kajzer (long-term unemployment rate), Maja Kersnik (population in jobless households, poverty risk), Jasna Kondža (general government sector balance, general government expenditure), Mateja Kovač (agricultural intensity, tree-felling intensity), Tomaž Kraigher (unemployment rate, employment rate, labour productivity, average number of schooling years of people in employment, share of the population with a completed secondary or higher education, life expectancy and infant mortality), Janez Kušar (share of gross fixed capital formation in GDP), Jože Markič (balance of payments, gross external debt), Slaven Mickovic (general government debt), Ana Murn (state aid), Janja Pečar (cross-regional variation of unemployment, cross-regional variation of gross domestic product), Jure Povšnar (energy intensity, share of road transport in freight transport, renewable energy sources), Matija Rojec (foreign direct investment), Metka Stare (use of the internet), Branka Tavčar (gross domestic product per capita in purchasing power standards, real growth of gross domestic product), Aco Trampuž, Katarina Zajc (court backlogs), Boštjan Vasle (inflation), Ivanka Zakotnik (composition of merchandise exports according to factor intensity, share of dirty industries in manufacturing), Eva Zver (total public expenditure on education), Luka Zakelj (number of researchers per thousand of the labour force, gross domestic expenditure on research & development, innovators and the number of patent applications per million residents filed at the European Patent Office). IMAD Development Report 2004 5 Contents CONTENTS Foreword 7 Summary of the main findings 9 DEVELOPMENT REPORT 15 1. Development results 17 1.1. Balanced economic, social and environmental development 17 1.2. Changes in the economic structure 20 2. Preconditions for implementing the development strategy 24 2.1. Macroeconomic stability 24 2.2. Completion of institutional reforms from the transition period 27 3. Mechanisms for implementing the development strategy 31 3.1. Transition to a knowledge-based society 31 3.2. Strengthening the economy's competitiveness 35 3.2.1. Improving the business sector's competitiveness 35 3.2.2. Financial sector 40 3.2.3 Infrastructure 42 3.3. Improving state efficiency 46 3.4. Balanced regional and spatial development 50 4. Environmental development 54 5. Social development 57 6. Meeting the Lisbon Strategy objectives 61 Bibliography and sources 65 Analytical appendix - Indicators 69 Country acronyms: A-Austria, B-Belgium, BG-Bulgaria, BY-Belarus, CH-Switzerland, HR-Croatia, CZ-Czech Republic, CY-Cyprus, DK-Denmark, D-Germany, E-Spain, EE-Estonia, EL-Greece, F-France, FIN-Finland, HU-Hungary, I-Italy, IRL-Ireland, L-Luxembourg, LT-Lithuania, LV-Latvia, NL-Netherlands, MT-Malta, NO-Norway, PL-Poland, P-Portugal, RO-Romania, RU-Russia, S-Sweden, SI-Slovenia, SK-Slovakia, TR-Turkey, UA-Ukraine, UK-United Kingdom. IMAD 7 Development Report 2005 Foreword Foreword The Development Report's primary purpose is to monitor implementation of the Strategy for the Economic Development ofSlovenia (SEDS) adopted in July 2001. The Report assesses the extent to which the country's development is following the goal of a sustainable improvement in the welfare of Slovenians and analyses the degree to which the development factors and mechanisms set out in the SEDS have been further carried out. The Report is already recognised by the government and the professional public. The Report is largely based on a list of indicators designed to monitor development that were tentatively formulated when the SEDS was being prepared. Selection of the indicators was based on the SEDS' content and data provided by the Statistical Office of the Republic of Slovenia (SORS) and other institutions. When choosing the structural indicators, we attempted to achieve maximum compatibility with those developed by the European Union to monitor the Lisbon Strategy. This year's list of indicators does not differ significantly from that used in previous years. Some indicators have not been updated, either because no new data were provided or because they are too complex to be updated every year. The following indicators have been added to those used last year: innovation active enterprises and the number of patent applications per million residents filed at the European Patent Office, public expenditure on education and long-term unemployment rate. Slovenia's entry to the EU has brought the issue of reconciling Slovenia's national development strategies with those in the Lisbon Strategy to the fore. Slovenia's main strategic document for economic development is the Strategy for the Economic Development of Slovenia 2001-2006 (SEDS) from 2001. The counterpart in the EU is the Lisbon Strategy, which was adopted in 2000 and updated subsequently at several European Council meetings (Gothenburg, adding environment-related guidelines, and Barcelona, adding R&D guidelines, for example). These two documents raise several fundamental questions. First, to what extent are they compatible and, second, how can Slovenia align its national strategy with the Lisbon Strategy bearing in mind the issues that are most important for Slovenia, as well as determining how Slovenia's national interest should affect its implementation? The problem is being resolved through the creation of a new strategy (Slovenia's Development Strategy, Draft for Public Debate, 2004). The decision to prepare a new Strategy for Slovenia's Development (SSD) was taken by the government in July 2003. The reasons were the following. First, the new strategy would be drafted so as to better facilitate its implementation as past Development Reports had found that the previous SEDS was only being partially implemented. This was to be achieved with a more detailed description of the short-term priorities and the means for achieving them. A similar process is already taking place at the European level with the drafting of a new, better-focused Lisbon Strategy which the European Council will adopt at its March meeting in a new push to stimulate its implementation. Second, a new, comprehensive development strategy not focussing primarily on economic issues was needed. Third, accession to the EU formally ends the transition period and Slovenia must thus formulate its own national goals and strategy for the first decade of its membership in the EU. IMAD Development Report 2005 8 Foreword The Strategy for Slovenia's Development is expected to be adopted in the first half of 2005, at which point it will replace the existing SEDS. It will also be the basis for a National Lisbon Action Plan that is set to be drafted in autumn, which will generate the institutional mechanisms for implementing the development strategy. After its adoption, the IMAD's focus will be to develop the appropriate methodological tools to follow the progress towards the designated goals and priorities. The majority of the indicators developed for monitoring fulfilment of the SEDS' objectives are also suitable for monitoring those set out in the SSD. In those areas which the SEDS did not cover new indicators will need to be developed. The progress towards the stated goals and developmental priorities will be reported in a similar fashion - with an annual Development Report. This is the fourth consecutive year for which we have prepared a Development Report. It focuses mainly on an indicator-based assessment of the initial conditions for the new strategy (SSD) and it is also the final report on implementation of the SEDS. Less attention is paid to progress in structural reforms because a special report, the Report on Structural Reforms, was prepared using the European Union's methodology for the second consecutive year. Moreover, the Report does not give guidelines for implementing the strategies and priorities as these will comprise an integral part of the Strategy for Slovenia's Development. The Report utilises the latest official data, spanning different time periods (although mainly 2002 and 2003), and hence it does not present cross-sectional statistics for a given moment. The analytical appendix presents the latest available international comparisons while the text of the report was enriched with the newest national statistics in order to clarify trends and place them in the international context. The period covered by the Report is therefore determined by the data available by 28 February 2005. IMAD Development Report 2005 9 Summary of the Main Findings Summary of the main findings Due to the duality of the Report, as mentioned in the Foreword, the contents of this year's Report have been modified somewhat from previous years. As in previous years, the central part of the Report presents Slovenia's achieved development level and the degree to which the SEDS' goals and directives have been fulfilled. The concluding sections include a new chapter on how Slovenia's development is being viewed by the European Commission via structural indicators and on how Slovenia is fulfilling the Lisbon Strategy's goals. With this approach, developmental progress at the national level is thus being integrated with an assessment of progress in achieving larger goals set at the international level. 1. Implementation of the SEDS As in previous years, we may conclude that the concept of balanced economic, social and environmental development is not being realised in its entirety (Table 1). The level of economic development is steadily increasing as Slovenia is gradually closing its developmental gap relative to the EU-15 average, but at a rate slower than in some other new EU members. Slovenia's economic development is being accompanied by developmental and structural weaknesses in various areas, and these are only slowly being eradicated. The results of social development are favourable in many areas, with some levels of development already being comparable to the most developed EU members. Environmental development has been slower due to the sluggish pace of change in economic structures, production processes and environmentally-destructive behaviour of the population; however, some positive changes have nevertheless been taking place. In terms of economic development, favourable results have been achieved in the area of macroeconomic stability. Real GDP growth improved in 2004 and reached 4.5% in the first nine months compared to the same period in 2003. It was driven by export activity and further growth in domestic consumption. This strong growth had a positive impact on labour market conditions. These favourable trends occurred in a stable macroeconomic environment. The co-ordinated macroeconomic policies of the government and the Bank of Slovenia, particularly regarding stabilisation of the exchange rate after entrance to the ERM II, helped further dampen the growth in consumer prices which decreased from 4.6% to 3.2% during the course of 2004. The current account deficit increased slightly and both exports and imports grew at a higher rate than before. The government deficit reportedly remained stable in 2004 relative to 2003. The labour market witnessed a shift in the structure of registered unemployed, with an increase in the proportion of first-time job-seekers and women. Structural changes have been occurring slowly, mainly because the government has not been quick enough in adopting transition and other structural reforms. The government managed to partly catch up with those countries that were the quickest to adopt reforms in the late 1990s, although the relative pace of its reforms has slowed since 2001. Reform remains most urgent in the non-banking financial sector IMAD Development Report 2005 10 Summary of the Main Findings as well as in competition policy legislation as is evident in the economic composition of gross value added. The share of agriculture and industry relative to services is decreasing too slowly and thus the disparity between the structural composition of Slovenia and the EU is increasing. In the services sector, growth has especially been too slow in the business, financial and information services sectors. In manufacturing, restructuring in the direction of technologically more intensive industries needs to intensify. The main reasons for the unacceptably slow pace of structural change lie in the insufficient development of the key developmental factors, namely human resources, research and development activity, innovation, and other factors fostering development. The EBRD and the WEF have also taken note of the unfavourable structural changes in Slovenia. The WEF finds that while Slovenia's degree of national competitiveness is improving it is still gradually being overtaken by countries previously ranked lower - a serious indication that, without accelerating the country's structural reforms, the relatively positive economic and social development trends could potentially halted. According to the SEDS, the key development factors include the formation of a knowledge-based society, increasing the competitiveness of the economy, liberalising infrastructure and changing the state's role in economic development. Slovenia is only slowly decreasing its gap vis-i-vis the EU-15 in its goal of becoming a knowledge-based society and this is despite progress in certain areas (e.g. increased tertiary education enrolment, business sector R&D expenditure, Internet access). The shortcomings in the area of education and training mainly lie in its efficiency and quality, while the problems in R&D activities are chiefly tied to insufficient innovation activities by firms and an inadequate institutional support framework, which has also been hindering technological modernisation of the economy. Such results are insufficient to ambitiously close the gap relative to advanced countries in the area of moving towards a knowledge-based society. An analysis of the business sector's competitiveness yields findings pointing to the unacceptably slow structural reforms. Despite positive trends in certain areas, the process of restructuring towards products with higher value added needs to be intensified in order to strengthen long-term international competitiveness and cut labour costs per unit of output. The current labour costs are only sustainable with a shift towards output with higher value added. The entrepreneurship which would foster dynamic structural changes is being insufficiently developed, the number of firms has been steadily dropping since 1999, the population's enthusiasm for entrepreneurship is low, and the rate of failed businesses is among the highest in the world. The financial system remains poorly developed. After several years of a gradual shrinking of the developmental gap vis-i-vis developed EU countries, the gap has increased in the past year. Banks are not quite fulfilling their role in economic development. A somewhat smaller, albeit still significant, developmental gap persists in the area of insurance. The capital market's development is also lacking. Greater efficiency in the financial system will require the establishing of a stable ownership structure for the main financial intermediaries. No progress was witnessed in terms of infrastructural liberalisation or privatisation in the past year. According to the European Commission, these restructuring processes appear to be too slow in all new EU members, particularly in the energy and natural gas sectors. The EBRD has particularly noted Slovenia's limited competition levels in the telecommunications sector, especially in land-line telephony. In terms of the state's role in setting the rules governing economic activity, IMAD Development Report 2005 11 Summary of the Main Findings court backlogs continue to decrease quite quickly in general and also in the domain of land registries, yet backlogs continue to grow in the economically crucial area of executing and enforcing court orders. Antitrust policy remains institutionally weak. Regarding the management of economic resources, the trend of increasing public finance revenues has been stopped, but expenditure on wages and transfers continues to grow. The decrease in the government budget deficit after 2000 has been accomplished almost exclusively with an increase in revenues as a share of GDP -that is, by increasing the fiscal burden - which is a development that contradicts the SEDS' directives. Positive changes have occurred in the structure of government aid, although remaining weaknesses include an insufficient consideration of regional goals and a lack of support for aid that would directly follow regional developmental directions. The state's organisational and operational efficiency has improved in terms of the quality of both public institutions and the business climate. Regional disparities in levels of economic development remain relatively low compared to other EU members, and they have stayed unchanged over the last few years. The disparity in GDP between the most and least developed regions has increased slightly, while differences in unemployment rates have been decreasing for some time. The most significant problems in both levels of development and Table 1 : Overall evaluation of development achieved by areas AREA IMPROVEMENT WEAKNESSES Sustainable increase in welfare Narrowing gap in economic development; favourable outcome in social development. Slow improvement in environmental development. Changes in the economic structure (measured by the structure of GDP) Gradual increase in the share of services. Excessive share of industry; business and financial services lagging behind; slow changes in manufacturing towards higher value-added and technology-intensive production. Macroeconomic stability Strong economic growth; lower rise in consumer prices; balance of payments in equilibrium. Public finance expenditures not developmentally oriented; economic growth could be stronger; increase in the fiscal burden; low rate of employment among younger and older workers. Transition reforms Business sector reforms pursued further, but still too slowly. Slow reforms in the areas relating to the financial sector, antitrust policy, and economic institutions. Knowledge-based society Population's education level and enrolment; increased investment in research and development; Internet use. Inferior efficiency and quality of education, institutional organisation of R&D activities; slowness of introducing competition in electronic communications, low level of firm innovation. Economic competitiveness Increase in productivity; increasing market shares in the most important foreign markets (albeit ata progressively slower rate). Insufficient enterprise restructuring towards higher value-added and technology-intensive production; lack of long-run viability in current export structure; low level of entrepreneurship. Financial sector Creating conditions for raising the financial sector's competitiveness; growth of mutual funds. Introducing efficient ownership structure in banks and insurance companies; capital market development. Infrastructure Increase in infrastructural investments. Inefficient public companies in public water and municipal waste services; liberalisation of railway transport. The state Reduced court backlogs in the most important cases; halt in public finance expenditure growth; improved quality of public institutions and investment climate. Court backlogs important for the functioning of economic subjects, antitrust policy, growth of wages and social transfers in public finance expenditures. Regional development Relatively low developmental disparities; decreasing disparities in unemployment rates. Lagging development of the Pomurska region and increases in the lagging behind of the Zasavska and Savinjska regions. Environmental development Institution-building and implementation; organic farming; high share of renewable energy sources. Energy intensity; increase in environmentally-unfriendly industries; agriculture intensity; emission of greenhouse gasses. Social development Social cohesion and poverty reduction; relatively low income inequality in general and between the sexes; completion of the majority of social protection reforms. Slow preparation of health reforms; low employment rate among older workers. Source: IMAD. IMAD Development Report 2005 12 Summary of the Main Findings unemployment remain in the Pomurska region, while the development gap has increased in other regions, in particular the Zasavska and Savinjska regions. Central Slovenia is the most developed region, having already attained 98% of the EU-15 average. Structural changes in economic development continue to negatively influence environmental development. The many recently passed environmental measures have thus failed to yield the desired results, an outcome largely resulting from a lack of co-ordination in economic and environmental development. Slovenia suffers from energy-intensive industries that are only slowly on the decline, an increasing share of environmentally hazardous industries, and an agricultural sector unusually (although decreasingly) reliant on fertilisers. Above-average results relative to the EU have been achieved in the areas of the environmental impact of traffic, organic farming and the use of renewable energy sources. Favourable social development results have been achieved with increases in life expectancy and decreases in both income inequality and risk of poverty rates before and after social transfers. The resources dedicated by the state to the population's welfare have been gradually increasing - this applies, for example, to compulsory social, health and pension-disability insurance systems - but are still below the EU average, and individual indicators (e.g. the difference between risk of poverty rates before and after social transfers) indicate that the target effectiveness of transfers needs to be improved. The effects of pension reform can be seen in the increase in the retirement age and the decrease in the wage-pension ratio. 2. Meeting the Lisbon Strategy objectives According to its achieved development results in terms of structural indicators based mainly on data for 2002 and 2003, on average Slovenia remains less developed than the EU average, and particularly so relative to the EU-15 average. It is, however, more developed than the average new EU member state. Slovenia is ahead of the EU average in individual indicators such as youth educational attainment, long-term unemployment rates, risk of poverty rates after social transfers, business investments and scale of freight transport. Slovenia lags behind the EU average according to general economic indicators in the realm of innovation and research activities, labour market indicators and environmental protection. Regarding areas where it lags behind the EU, Slovenia has managed to reduce the developmental gap according to the general indicators of economic development (using the latest available data). Developmental gaps have expanded, however, in areas relating to the labour market, innovation and research activities and environmental protection. Labour market trends were considerably more favourable in 2004 than in 2003 so the developmental gap has actually also decreased. The degree to which the Lisbon Strategy's individual goals are being fulfilled varies in Slovenia, as in other EU members. Slovenia has been successful in its goals of increasing female employment, Internet access, implementing directives from the Lisbon Strategy and increasing the share of renewable energy sources in IMAD Development Report 2005 13 Summary of the Main Findings primary electricity use. Some of these goals have already been attained. Slovenia has been less successful in achieving other goals but, if the favourable trends continue, some goals seem realistic for the future. However, others continue to be unrealistic as progress in many areas - despite the positive trends - simply appears to be too slow, for example in employing older workers, raising the average retirement age, or increasing the level of gross domestic expenditure on R&D activity. 3. Conclusion The Development Report is designed to monitor implementation of the SEDS' objectives and priorities through a system of indicators. As in the last three years, we find that the SEDS' goal of balanced economic, social and environmental development is not being realised in its entirety, in particular in the area of changing the economy's sectoral composition in which high value-added activities are only slowly increasing their market shares on one hand, and changes in the direction of more environmentally-friendly production are also too slow on the other. Slovenia's problems thus largely stem from its excessively slow transition to a free market which have resulted in a relatively low level of competitiveness and entrepreneurial initiative, factors which are the fundamental drivers of faster economic growth and development. The reasons for the slow realisation of the priorities and structural changes can be found both within the business sector, which has been too slow to restructure and seek new business opportunities, as well as in the state's poorly co-ordinated and fragmented developmental policies. The weaknesses of current economic, social and environmental development, as shown by the SEDS' system of indicators and the European Commission's structural indicators, should provide the basis for a new set of priorities in the new Slovenia's Development Strategy (SDS). This Strategy should focus mainly on national objectives (while taking supranational objectives into account), with particular emphasis on rapid structural adjustment and achieving a reduction in the development gaps relative to the average development level of EU members (catching-up objectives) and improved recognition especially in areas where Slovenia enjoys comparative advantages against (current and new) EU members. Assessing the role of the government through development results alone has at least two shortcomings. First, there is a time lag between when the government introduces new measures and when visible results arise from these changes. Second, another factor that should be assessed is the connection between the measures taken and results achieved as well as the flexibility of these measures in relation to the underlying conditions and changes. The co-ordination of measures should also be verified as certain measures can have both positive and negative effects (for example, some social measures may undermine the motivation to be economically active, or the promotion of dirty and energy-intensive industries may be detrimental to the environment). The main guidelines for improving the government's developmental role are to: (i) define the most important short-term actions and measures for each priority, including the clearly defined agents in the new SDS; (ii) break down and co-ordinate measures in the new National Development Programme; (iii) set up a IMAD Development Report 2005 14 Summary of the Main Findings monitoring system for measures and their effects on the main components of development; and (iv) make regular reports on development results and the effectiveness of various measures. Development Report IMAD Development Report 2005 17 Development Results 1. Development results The new understanding of development outlined in the document Slovenia in the New Millennium: Sustainability, Competitiveness, Membership in the EU - Strategy for the Economic Development of Slovenia 2001-2006 (SEDS) - is described in two separate parts. The first part focuses on the long-term balanced development of the different, yet inter-related developmental components, presented in the new development paradigm. The second part of the document sets the course of economic development in the medium-run (until 2006) and provides measures to gradually bring Slovenia's development level and its economic structure closer to that of developed economies. 1.1. Balanced economic, social and environmental development THE SEDS' OBJECTIVE: The developmental paradigm presented in the SEDS arises from an equal consideration ofthe economic, social and environmental dimensions of both welfare and sustainable development, ensuring that the needs ofcurrent generations are met without impeding the ability of future generations to meet their own needs. Sustainable development manifests itself in three ways: structurally (through three sources or components of welfare), temporally (through multiple generations), and spatially (by emphasising regional development). Based on Slovenia's progress in each of these three spheres of development, the SEDS gives priority to reducing the economy's development gap, which is to be achieved without increasing the relatively narrower gaps in social and environmental development. FINDINGS: Slovenia's level of development is steadily increasing and Slovenia is gradually reducing the developmental gap relative to the EU-15 and EU-25 average. Economic development is still hindered by many structural problems which have even been expanding Slovenia's gap with developed countries in certain areas. As in the previous year, economic development was achieved concurrently with social development but with slower environmental development. Regional disparities remain largely unchanged. ANALYSIS: In terms of economic development, Slovenia is gradually closing its gap against the European average, as indicated by the synthesised indicators and individual analytical indicators. Based on one synthesised indicator, namely gross domestic product per capita at purchasing power standards (PPS)1, Slovenia has attained significant economic progress in last seven years (1995-2003), as its development 1 Purchasing Power Standard (PPS) is an artificial general reference value used in the EU to express the volume of economic aggregates. Economic volume aggregates in PPS are obtained by dividing their original value in national currency units by the respective purchasing power standards (currency conversion rates that eliminate the effect of different price levels). Since Purchasing Power Standards are statistical calculations which are the result of some conceptual assumptions, methodological determinations and derivation procedures, they can be used with an assumed error level of 5%. IMAD Development Report 2005 18 Development Results level has moved from 61 to 71 percent of the EU-15 average. After the decrease in the EU average due to the entry of new members (GDP per capita at PPS in the EU-25 is 92 percent of the EU-15 average), Slovenia reached 77 percent of the average in the EU-25 and thus exceeded the threshold for the least developed regions (countries) in the EU.2 Among the EU-15, Slovenia has surpassed Portugal in terms of economic development but remains behind Greece, which lagged behind Slovenia during the 1999-2001 period. Amongst the new EU members, only Cyprus is better than Slovenia (with 83% of the EU average). Slovenia's development pace exceeded that of the EU during the 1995-2001 period but remained behind the development pace achieved by the new EU members Estonia, Latvia, Lithuania and Hungary. Similar results can be found by examining the analytical indicators (Table 2) which, in addition to the indicator for economic development, point to developmental imbalances in different areas that reflect the progressively exacerbating structural problems. Labour market indicators, which showed a drop in employment and an increase in unemployment for 2003, have improved considerably for 2004. In terms of social development, measured by the synthesised human development index,3 the new figures for 2002 yield positive changes from previous years. In 2002, Slovenia received both a higher index value and a higher rank (going from 29th to 27th amongst 177 countries). The values of the sub-indexes that form the basis of the human development index also increased; the greatest positive change occurred in the education subindex, with somewhat lower increases in the subindex of GDP at PPP. Slovenia's lowest subindex rank (in 33rd place) comes from life expectancy. A comparison with the EU-25 indicates that Slovenia ranks below Portugal (26th place) but above all other new EU members. It is followed by Cyprus, Malta and the Czech Republic (ranking from 30th to 32nd places, respectively). Other countries from the group of new EU members have steadily increased their index values, although not quickly enough to increase their rank. Social development is described in even greater detail by the analytical indicators (Table 2), which indicate slow yet steady development and a decrease in poverty hazard rates. The environmental development and long-term goals of the SEDS for the current year are again described not with a synthesised indicator4 but with a collection of partial indicators (Table 2). As in the previous year, Slovenia still suffers from a high, albeit slowly decreasing, energy intensity, as well as excessive fertiliser and 2 Individual EU members' levels of development range from 40% to 215% of the EU average. New EU members are much less developed, on average, than the EU-15 and achieved 53% of the EU average. 3 The Human Development Index (HDI) is a measure of development that, despite some methodological limitations, most broadly presents a country's level of social development. The HDI is comprised of subindices that reflect various aspects of a country's development. The chosen subindicies are not optimally selected. For example, measures of the quality of life might improve the poverty index but these are only calculated for 17 OECD countries. The education subindex is also increasingly criticised for its failure to account for the difficulties of comparing schooling systems and its lack of insight into actual literacy. 4 Two synthesised indicators have been used thus far in previous Development Reports. In the first Report (Development Report, 2002), a special index for balanced development was used. Although it is a good statistic its complexity (it comprises around 150 indicators) makes its use in every report impractical. The index of balanced development was replaced by an index of genuine savings in previous reports (Development Report 2003, 2003) but it has been since omitted because it is a relatively poor proxy for environmental development. IMAD Development Report 2005 19 Development Results Table 2: Development indicators Development indicators Unit 2000 2001 2002 2003 2004 1. ECONOMIC DEVELOPMENT Gross domestic product per capita in purchasing power standards EU = 100 73 75 75 77 Gross domestic product growth Real annual growth (%) 3.9 2.7 3.3 2.5 Unemployment rate Labour force survey (%) 7.0 6.4 6.4 6.7 6.3 Employment rate Labour force survey (%) 62.9 63.9 63.4 62.5 65.6 Educational attainment structure of people in employment Average number of school years according to the labour force survey 11.4 11.4 11.5 11.6 Population with a completed secondary education Population aged 25-64 with a completed secondary education (%) 75.5 76.2 77.5 78.3 Researchers Number of researchers per thousand labour force 4.5 4.6 4.7 5.0 Public education expenditures Public expenditures as a % of GDP 6.1 6.0 R&D expenditure Gross expenditure on R&D as a % of GDP 1.44 1.56 1.53 1.53 Labour productivity GDP growth per employee (%) 3.1 2.2 3.7 2.8 Unit labour costs Rise in labour costs per unit of GDP (%) 3.2 0.1 -2.0 -0.5 Market share Share of exports/imports in the main trading partners (%) 0.478 0.500 0.528 0.531 0.541 Composition of merchandise exports according to factor intensity High-technology-intensive products (%) 15.3 15.9 16.5 18.1 17.6 Gross fixed capital formation As a % of GDP 25.1 24.5 23.3 23.9 Foreign direct investment Inward investment as a % of GDP 15.1 13.5 16.9 20.7 Total assets of banks Assets as a % of GDP 75.1 81.4 85.7 88.0 Insurance premiums As a % of GDP 4.6 4.9 5.1 5.2 Market capitalisation As a % of GDP 16.6 17.9 23.2 23.3 2. ENVIRONMENTAL DEVELOPMENT Share of dirty industries in manufacturing Index of production volumes growth in dirty industries 108.2 105.4 104.8 107.6 111.8 Energy intensity Primary energy consumption (toe/mill. EUR) 332.8 336.7 333.5 327.6 Renewable sources Renewable sources in total primary energy consumption (%) 11.9 11.7 11.2 10.8 Environmental impact of transport Road transport in total freight transport in tkm (%) 64.8 65.8 65.8 65.8 Agricultural intensity Use of NPK fertilisers (kg/ha) 172.3 166.4 162.3 155.9 Tree-felling intensity Removal relative to wood increment (%) 38.0 37.7 37.3 41.2 59.2 3. SOCIAL DEVELOPMENT Human Development Index Index value 0.879 0.881 0.895 Life expectancy Men, number of years 71.9 72.1 72.3 73.2 Infant mortality Per 1000 live-born children (%) 4.9 4.2 3.8 4.0 Poverty Population in jobless households (%) 10.1 9.9 8.1 Poverty risk Risk of poverty rate after social transfers 13.0 12.9 11.9 4. REGIONAL DEVELOPMENT Variation of gross domestic product across regions Coefficient of variation (%) 23.9 24.4 25.0 Variation of unemployment across regions Coefficient of variation (%) 31.2 33.5 34.8 33.9 30.7 5. NATIONAL COMPETITIVENESS National competitiveness - Growth Competitiveness Index Index value 4.70 4.64 4.70 4.75 Source of data: Development indicators. Notes: These results are discussed in the section above, and explained in greater detail in the Analytical Appendix. Some data for 2003 and 2005 are preliminary. An empty box indicates statistics are unavailable. IMAD Development Report 2005 20 Development Results pesticide use in agriculture, which is also decreasing. The share of road transport in freight transport is still relatively small and has remained constant for three years. Renewable energy use has declined marginally, while the tree-felling intensity increased slightly. The adoption of various measures for reducing pollution only constitutes the first step to a cleaner environment; larger changes can only come about with a structural shift towards more ecologically-friendly production technology and products. Regional disparities5 measured by GDP per capita at PPS are relatively small and increasing very slowly. The coefficient of variation6 indicates that these differences increased by 1.1 p.p. between 2000 and 2002, from 23.9% to 25%, and remained relatively low by international standards. According to an international comparison of the variation coefficients for 1995-1999 (using the old methodology7), Slovenia recorded one of the lowest regional disparities in the EU (placing it alongside Sweden, Greece and the Netherlands). In 2003, the previous trend of growing regional disparities in unemployment was reversed. From 2002 to 2004, the variation coefficient fell from 34.8% to 30.7%. 1.2. Changes in the economic structure8 THE SEDS' OBJECTIVE: The SEDS does not deal with sectoral policies directly. It does, however, point to some basic changes in the production structure of GDP expected to be brought about by Slovenia s economic development and its integration with the EU. At the same time, the SEDS takes into account globalisation processes, the integration of European markets, intensive technological progress, and the transition to a knowledge-based society. THE REPORT'S FINDINGS: Analysing the structure of gross value added during the 1995-2003 period reveals a drop in the proportion of agriculture and a rise in the proportion of services. Compared to the EU, Slovenia had a relatively higher proportion of industry (mining, manufacturing and energy) and a smaller proportion of services in 2003, and the disparity between the economic structures of the two increased from 1995 to 2003. An alarming fact is that the development gap in Slovenia is greatest in the proportion of financial and business services. In addition, the proportion of knowledge-intensive market services in Slovenia was much smaller than in the EU-15 in 2000 (the latest year for which data are available). A positive trend was witnessed in manufacturing where the proportion of technologically- 5 Regional development is presented separately in Section 3.4.: Balanced regional and spatial development. 6 The coefficient of variation is defined as the ratio of the standard deviation to the average, and this calculation is modified to take a region's size into account. 7 We expect that a comparison using the revised methodology for calculating GDP would reveal a similar relationship between Slovenia and other EU members. 8 Changes in the economic structure can be monitored from different points of view. This chapter focuses on changes in the production structure of gross domestic product which, however, does not reflect all important structural changes in the economy. Some of these other aspects are discussed in other sections of the Report (changes in merchandise exports according to factor intensity, electricity use etc). IMAD Development Report 2005 21 Development Results advanced sectors increased in 2003. The structural changes in these sectors were considerably greater than in previous years; however, they remain too slow from the point of view of increasing the gross value added. ANALYSIS: The past ten years have witnessed an increase in services and a decrease in agriculture in the structure of gross value added, with the share of industry remaining relatively constant. The share of agriculture in total value added in the Slovenian economy fell by 1.7 structural points, while services rose by 1.9 structural points, to 63.1% of total value added in 2003. The share of industry decreased by 0.3 structural points which is mainly associated with the declining economic importance of mining (which edged down by 0.5 of a structural point). While the share of manufacturing decreased only by 0.1 of a structural point, the structure within this industry changed markedly. The share of construction grew (by 0.3 of a structural point), an increase largely attributable to increased motorway construction. The share of agriculture decreased in 2003 from the previous year (due to unfavourable weather), while the share of industry increased. Compared to the EU, Slovenia has a considerably larger share of industry and a smaller share of financial and business services. In 1995, the proportion of industry was 6.4 structural points higher than the comparable figure in the EU-25, a difference which grew to 9 structural points by 2003. Conversely, Slovenia has a considerably smaller share of financial and business services: it lagged behind by 5.8 structural points in 1995, a difference which increased to 7.1 structural points by 2003. In 2000, the proportion of knowledge-intensive market services9 in Slovenia was considerably lower than in the EU-15 (Figure 1). These accounted for only 14.5% of total value added, while the comparable figure for the EU-15 was 18.7%. The difference is largely attributable to the relatively undeveloped business services sector, in which Slovenia lagged behind the EU-15 by 3.9 structural points.10 In 2003, the manufacturing sector saw accelerated structural changes after the relatively slow changes during the 2000-2002 period.11 Calculations indicate that 9 The OECD defines knowledge-intensive market services based on input-output tables, data on R&D and composition of workforce skills by activity. Using the OECD methodology, knowledge-based market services include the following SIC codes: division 64 (Postal and telecommunication services), divisions 65-67 (financial intermediaries), and divisions 71-74 (business services excluding real estate services). 10 Internationally comparable statistics for later years are unavailable but we estimate that the gap had not decreased by 2003 (indeed, it may have grown). The disparity in the share of business and financial services (which contributes the most to knowledge-based market services) between Slovenia and the EU-15 grew further in the 2000-2003 period. It should be noted that the lower share in Slovenia may also have resulted from a lower propensity to outsource these services. 11 The indicator of the intensity of structural changes (Landesmann, 2000, p. 21): (S) reflects the dynamic adaptive abilities and mobility of the factors of production for individual manufacturing sectors in a certain time period. sh .: share of the i-th of m sectors in total value added or employment in manufacturing (which was divided into 14 sectors according to the SIC codes) t: base year or period; k = 1.........n IMAD Development Report 2005 22 Development Results Figure 1: Share of knowledge-intensive market services in total value added, in 2000 ^ Post and telecommunications □ Financial intermediation □ Business services 20 25 Source: OECD, Technology and Industry Scoreboard, 2003. the restructuring intensity in the manufacturing sector, measured by changes in the employment structure and value added, were at a very low level during 2001 and 2002 (with indicator values of between 0.14 and 0.33).12 In 2003, however, the process of structural adjustment intensified (the indicator value, measured by changes in the structure of value added, increased to 1.02, although the comparable figure measured by changes in the employment structure did not significantly deviate from the average of previous years). In 2003, the share of technologically advanced sectors grew. Using the established OECD methodology for measuring the distribution of industries by technological advancement (Hatzichronoglou, 1997, pp. 6-23), we find a marked increase in the 12 If the value of the indicator is low (close to zero), the intensity of structural changes in manufacturing is low during the relevant time period. Conversely, the higher the indicator value the more intense the structural changes that are taking place. IMAD Development Report 2005 23 Development Results share ofhigh- and medium-high technology industries (from 37.6% in 2002 to 40.4% in 2003). The share of medium-low technology industries remained at 26.4% in 2003, the same level as in the previous year; while the share of low-technology industries dropped by 2.5 structural points in 2003 compared to the previous year, to 33.3%. The changes were to a large degree induced by a considerable increase in the share of chemicals and chemical products, which are within the first group, along with a concurrent decrease in the proportion of man-made fibres, paper and publishing as well as textiles and leather goods, which fall into the low-technologically category. Changes in the employment structure by industry for the manufacturing sector based on technological advancement were not as favourable. The share of high and mediumhigh technology industries was 31.9% in 2003 and improved by only 0.7 of a structural point over the previous year, the share of medium-low technology industries remained at the level of the previous year, 27.4%, while the share of low technology industries decreased to 41.7%, a decrease of 0.9 of a structural point from 2002. IMAD Development Report 2005 24 Preconditions for Implementing the Development Strategy 2. Preconditions for implementing the development strategy According to the SEDS, the preconditions for implementing the development strategy include ensuring macroeconomic stability and completing institutional reforms. The first is implemented through classical macroeconomic (monetary, wage and fiscal) policies, while the second requires the establishing of a functional market economy. 2.1. Macroeconomic stability THE SEDS' OBJECTIVE: Basic macroeconomic stability is a fundamental requirement for effectively achieving the SEDS' objectives. Achieving it requires addressing the classical monetary, revenue and public finance policies of macroeconomics. Monetary policy's main goal must be to gradually reduce inflation to a level suitable for integration into the Economic and Monetary Union. According to basic macroeconomic constraints and the broad guidelines of the EU's economic policies, the goal of wage policy must be to keep real growth in the gross wage per employee below the rate of labour productivity growth, which should help reduce inflation and create conditions for firms to increase their investment in technology, markets and human capital, leading to improved competitiveness and higher employment. Fiscal policy's strategic goal must be to restructure general government revenue and expenditure, which should help boost the economy's competitiveness and bring public finances into balance without increasing the share of expenditure in gross domestic product in the medium term. THE REPORT'S FINDINGS: Real GDP growth improved in 2004 and reached 4.5% in the first nine months compared to the same period in 2003. It was driven by export activity and further growth in domestic consumption. This strong growth had a positive impact on labour market conditions. Thesefavourable trends occurred in a stable macroeconomic environment. The co-ordinated macroeconomic policies of the government and the Bank ofSlovenia, particularly regarding stabilisation of the exchange rate after entrance to the ERMII, helped further dampen the growth in consumer prices which decreasedfrom 4.6% to 3.2% during the course of2004. The current account deficit increased slightly and both exports and imports grew at a higher rate than before. The government deficit reportedly remained stable in 2004 relative to 2003. The labour market witnessed a shift in the structure of registered unemployed, with an increase in the proportion of first-time job-seekers and women. In 2004, economic activity began to accelerate again after several years of relatively slow growth that had coincided with the unfavourable international economic conditions. Real gross domestic product (GDP) growth reached a year-on-year rate of 4.5% in the first three quarters of 2004 (compared to annual growth of 2.5% in 2003), driven by a higher export rate and sustained growth in domestic consumption. The boost in export growth was influenced by one-off factors prior to EU accession, a trend which was further reinforced by renewed economic growth IMAD Development Report 2005 25 Preconditions for Implementing the Development Strategy in the EU. The former trend can be gleaned from examining the quarterly export dynamics as export growth was highest prior to entry to the EU - in the second quarter - with a year-on-year rate of 13.7%. At the same time, the high level of export activity which persisted in the third quarter reflects the positive effects of improved international economic conditions in 2004. In this context, it was somewhat disturbing that economic growth in several key trading partners (Germany, Italy) was rather slow despite an increase over 2003. The favourable international economic trends were accompanied by positive trends in Slovenia. The strongest growth in investment was recorded among investments in equipment and machinery as well as housing, with the latter mainly being due to the anticipated effects of the conclusion of the first National Housing Savings Scheme. Investments in highway construction also remained high. The growth in domestic consumption was also aided by the increased availability of bank credit, due to both lower interest rates and changes in the monetary policy of the Bank of Slovenia after entry to the ERM II, during which Slovenian banks have gradually begun to lower the share of central bank notes in their portfolios (a trend previously associated with the sterilisation of currency inflows and depreciation of the tolar).13 Fastest growth was recorded in long-term, tolar-denominated household loans and foreign currency loans to enterprises from domestic banks. The structure of domestic consumption exhibited some one-off effects associated with favourable expectations arising from EU entry as well as changes in the foreign trade and tax regimes, which were reflected in the contribution of inventory growth to the growth of GDP. However, based on the data available for 2004 the lower nominal interest rates did not lead to excessive growth in domestic consumption. Since nominal interest rates fell concurrently with inflation, the changes in real interest rates were relatively small. Moreover, the non-interest-rate costs associated with borrowing remained high and the slow growth in consumption was also the result of the sluggish growth in the real wage rate, which grew by just 2 percent in 2004. Trends in the labour market in 2004 followed the favourable general trends, with higher economic growth enabling an increase in employment and a decrease in unemployment. The employment rate thus grew from 62.5% in 2003 to 65.6% in the second quarter of 2004. The unemployment rate according to labour force surveys fell from 6.7% in 2003 to 6.3% in the second quarter of 2004, while the registered unemployment rate dropped from 11.2% to 10.6%. The business services sector posted the highest growth in employment, and relatively strong increases also occurred in the public administration, health, financial intermediaries, education and agricultural sectors, while the rate continued to fall in industry and transportation. In manufacturing, the decrease in employment was most pronounced in labour-intensive sectors and sectors most affected by entry to the EU (textiles, leather products, and food processing), while the increase occurred mainly in sectors where sales to foreign markets grew significantly (vehicle manufacturing, machinery, rubber and plastic products, with somewhat lower growth in the chemicals sector). In addition to the favourable economic conditions, the fall in unemployment was significantly influenced by active employment policies focusing on unemployed people with poor employment prospects, enabling a positive change in the structure 13 Jazbec and Masten (2004) also point this out in their paper 'The Development of the Slovenian Banking-Financial Sector through the Viewpoint of Entry into the EMU: Expected Effects on Macroeconomic Stability and Economic Growth.' IMAD Development Report 2005 26 Preconditions for Implementing the Development Strategy of the unemployed. This lowered the share of older and long-term unemployed workers as well as the share of the uneducated, with the latter being attributable to educational programmes for the unemployed. The favourable economic trends occurred within a stable macroeconomic environment largely resulting from the co-ordinated macroeconomic policies of the government and the Bank of Slovenia, which were adopted in November 2003 based on guidelines from the Programme for Entry to the ERM II and Adoption of the Euro. The stable macroeconomic environment and credibility of Slovenia's projected economic policies enabled its early entry to the ERM II exchange stabilisation mechanism in the first group of countries (alongside Estonia and Lithuania) in June, 2004. One of the key achievements of its macroeconomic polices in 2004 was the further cutting of inflation, a decrease which began in earnest in 2003. By the end of 2004, the rise in the consumer price index was 3.2 percent - a growth rate that was 1.4 p.p. lower than in 2003. In 2003, the lower inflation rate resulted from actions taken in the areas of price regulation and fiscal policies; in 2004, the further fall in inflation resulted mainly from stabilisation of the tolar upon entry to the ERM II. The government concurrently began implementing the Plan for the Increase of Administered Prices in 2004 and 2005 as well as co-ordinated changes in fiscal burdens. In contrast to 2003, the primary goal of price regulation policy - to ensure that growth in regulated prices is in line with the growth of unregulated prices - was not achieved. Regulated price growth outpaced the growth of other prices mainly due to external factors (growth in global oil prices). The government attempted to cushion the negative influence of these factors by counter-cyclically adjusting excise duties; thus, the higher oil prices14 contributed relatively less to inflation than they otherwise would have. Further, entry to the EU and the ERM II favourably influenced inflationary expectations, as did lower food prices due to the abolition of tariffs upon entry to the EU - this effect was on the upside of what was expected. Sustaining the co-ordinated macroeconomic policies will be key to the further lowering of inflation in 2005 and for approaching the Maastricht convergence criteria in the Euro adoption reference period. The current account of the balance of payments increased in 2004 (to EUR -179 m), but remained under one percent of GDP. The continued growth of exports in the second half of the year indicates that the stabilisation of the exchange rate did not have a negative influence on export trends, while the continued low current account deficit indicates that the central exchange rate between the tolar and the euro that was determined upon entry to the ERM does not deviate significantly from the equilibrium rate. Gross external debt increased by approximately EUR 1.5 bn during the first nine months of 2004, which is approximately 50% more than in the same period in 2003. As in previous years, a large share of this debt can be attributed to banks' borrowing from abroad and subsequently using these funds for foreign-currency denominated loans to domestic enterprises. Liquidity and solvency indicators deteriorated compared to 2003 to a level comparable to that in 2001; the country's position as a net debtor worsened as well, with the net position of the banking sector worsening but the net debtor position of enterprises and other nonbanking sectors posting moderate improvements. 14 Higher oil and transport/heating fuel prices contributed 1.0 p.p. to inflation in 2004, amounting to 71% of the total increase in regulated prices. IMAD Development Report 2005 27 Preconditions for Implementing the Development Strategy According to preliminary estimates, the government sector deficit - which had decreased from 3.4% of GDP in 2000 to 2.0% in 2003 - did not change significantly in 2004 (amounting to 1.9% of GDP). Calculations from the IMAD's macroeconomic model indicate that, in addition to the significantly higher economic growth compared to 2003, the outcome resulted from changes in several macroeconomic factors, especially an inflation level that was much lower than projected in the Budget memorandum. Macroeconomic outcomes - differing significantly from those projected in the Budget memorandum - influenced mainly budget revenues, while budget expenditures - of which 80% to 90% are already determined by law - cannot be modified as easily to adapt to changes in macroeconomic outcomes. The share of total government expenditure remained at a level similar to that in 2003 (48.2% of GDP according to the ESA 95 methodology), while the share of revenues (46.1%) decreased slightly. A significant part of the decrease is attributable to the reduced revenues from customs tariffs associated with Slovenia's entry to the EU and the slower growth in revenues from mandatory social security contributions, which followed the wage growth in 2004. Moreover, revenues from excise duties and corporate income tax increased in 2004 relative to GDP. The general government debt increased marginally in 2003 (as it did in 2002) due mainly to growth in the debts of direct users of the government budget and government funds, but also due to the greater indebtedness of local governments and social security funds. Further, the gross public debt decreased by 0.1 p.p. in 2003, to 29.4%. In 2003, the structure of government debt financing continued to change. Thus, the share of loans in 2003 decreased while the share of securities increased. The share of financing instruments with a fixed interest rate continued to increase, as did the share of tolar-denominated debt. 2.2. Completion of institutional reforms from the transition period THE SEDS' OBJECTIVE: As a result of uncompleted institutional reforms from the transition period, Slovenia continues to exhibit excessive direct political interference in the economy and an over-regulation ofparticular sectors of the economy and the labour market. These circumstances allow the implementation gap15 to persist. In order to complete institutional reforms from the transition period, the SEDS envisaged completing the necessary transition reforms in the corporate andfinancial sectors, along with reforms ofpublic utilities, the labour market, the pension system, as well as in regional policy and areas where gaps were identified. THE REPORT'S FINDINGS: Slovenia has been relatively slow to implement transition reforms and it was not until the late 1990s that the government managed to partly catch up with countries that have been the fastest to adopt reforms. The pace of reform has again slowed in recent years and thus some remain unfinished. No progress was achieved in this regard in 2004. The need for reform remains most urgent in the non-banking financial sector and legislation relating to competition. 15 The implementation gap is the difference between the formally adopted measures and their actual implementation, that is the difference between the formal and actual influence of various social players. IMAD Development Report 2005 28 Preconditions for Implementing the Development Strategy The slow pace of reforms is also reflected in the competitiveness of the economy, in which incongruent developments threaten the relatively positive progression of the reforms. ANALYSIS: An analysis of the individual indicators used to calculate the transition index16 (Table 3) indicates that Slovenia's main backlogs remain in reforms of the non-banking financial sector and competition policy, with somewhat better results being seen in the privatisation of large enterprises and institutional reforms in the business sector. From 2000 to 2003, the index recorded progress in the areas of price liberalisation and business sector reform. There was no progress in 2004, however. Levels corresponding to values for market economies (the highest value of the index) were achieved in international trade liberalisation and the exchange rate system, as well as in the privatisation of small enterprises where the transition processes was almost completed by 1995. A comparison of the average annual transition index (the non-weighted arithmetic mean of the nine indicators) between the eight most advancing transition economies17 shows that, in 2004, Hungary's index value of 3.8 was closest to levels characteristic of market economies while Slovenia's value of 3.4 was the farthest away. In 2001 Table 3: Values of the EBRD indices for Slovenia 1991 1995 2000 2003 2004 Price liberalisation 3.0 3.0 3.3 4.0 4.0 Exchange rate system and trade liberalisation 3.0 4.0 4.3 4.3 4.3 Privatisation of small enterprises 3.0 4.0 4.3 4.3 4.3 Privatisation of large enterprises 1.0 2.7 3.0 3.0 3.0 Reform of the corporate sector 1.0 2.7 2.7 3.0 3.0 Competition policy 1.0 2.0 2.7 2.7 2.7 Reform of the banking sector 1.0 3.0 3.3 3.3 3.3 Reform of non-banking financial institutions 2.0 2.7 2.7 2.7 2.7 Infrastructural reform 1.7 3.0 3.0 3.0 Legal extensiveness' 4.0 Legal effectiveness2 3.7 AVERAGE OF ANNUAL VALUES OF EBRD INDEXES 1.9 2.9 3.4 3.4 3.4 Source: EBRD Transition Reports 2000, 2002, 2003 and 2004. Notes: 'the indicator shows to what degree the legislation meets minimum international legal standards; 2theindicator shows to what extent legally acknowledged rights can be realised through legal proceedings. No data are available for these two indicators for 2003 and 2004. 16 The European Bank for Reconstruction and Development (EBRD) has been measuring transition reform progress in 27 countries since 1994 with its special transition index. The transition index uses eleven indicators to cover six main reform areas: liberalisation, privatisation, enterprises, infrastructure, financial institutions and the legal environment. Each indicator is a synthesised assessment of progress made in a particular area, established on the basis of various data, descriptive information and analyses. The indicator values range from 1 to 4, where a plus or minus sign can be added to the basic value. In this case, a value of 0.3 is added to or subtracted from the basic value for the purpose of quantitative analysis. An index value of 1 means that a country is still at the level of a centrally-planned economy in the given area of transition; an index value of 4.3 means that a country has achieved the level of a market economy. 17 The comparison includes the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovakia, and Slovenia. IMAD Development Report 2005 29 Preconditions for Implementing the Development Strategy Slovenia was ahead of Slovakia, Lithuania and Latvia, but these countries stepped up their reform efforts considerably and overtook Slovenia as a result. Slovenia has recorded the relatively slow pace of reforms throughout the transition period. It has been behind Hungary and Poland since the start of the transition in terms of the achieved level of reforms and it has lagged behind Estonia since 1994. It overtook Slovakia in 1997 and reached the level of the Czech Republic and the average of all eight countries in 1999. However, all countries overtook Slovenia in the last four years in terms of the level of completed reforms. While synthesised indicators have the benefit of enabling international comparisons, their composite nature means that their weighting of the various indicators may be questionable. Hence, it is necessary to further discuss necessary reforms, especially those with a strong impact on competitiveness. In order to improve the economy's competitiveness, Slovenia needs to address several of its weaknesses, particularly those singled out by the European Bank for Reconstruction and Development -namely, reforms relating to the non-banking financial sector, competition policy and those addressing the inefficiency of the judicial system (EBRD, 2004, p. 178). The key reforms are classified into four groups. The first group comprises reforms in the areas of liberalisation and privatisation, with particular reference to the drawbacks of slowly privatising large state-owned firms, banks and insurers and the high proportion of prices that are regulated (according to the EBRD and IMAD18 the proportion of regulated prices in the consumer price index amounts to 18% and 16.1%, respectively). The second group consists of reforms of the business and competitive environment, where tax reform and other potential ways of improving competitiveness are considered improvements, and the main barriers mentioned include the lengthy procedures for registering new businesses and deleting bankrupted businesses from the registers, as well as high business registration costs which are even above the OECD average. The third group comprises reforms liberalising network industries, in which particular warning is given to the slowness of the energy sector's liberalisation process and the distorted price of electricity, which is much lower for large, energy-intensive state users than for other users. The considerable progress in liberalising the telecommunications sector is viewed positively but the report notes the limited degree of competition -especially for land-line telephony - and the fact that prices are determined independently of actual costs. The fourth group consists of the social sector, in which Slovenia is mentioned as preparing a health insurance reform in the 20032004 period. The EBRD notes the financial goal of the reforms (eradicating the deficit and stabilising healthcare expenditures to 9% of GDP), changes in the contributions for voluntary health insurance, and a change in the payment policy of hospitals. The last change is already being implemented. Institutional reforms are also partially reflected by national competitiveness, measured by the WEF19 index of growth potential and business competitiveness (WEF Global Competitiveness Report 2003/2004). In terms of growth potential, Slovenia's rank, despite a faster growth rate of its index value than the EU-25 and 18 Spring Report 2004, 2004, p. 89. 19 World Economic Forum. IMAD Development Report 2005 30 Preconditions for Implementing the Development Strategy EU-15, has fallen for two consecutive years, but by one place less in 2004 than in the previous year. Amongst EU members, Slovenia is more competitive than Lithuania, Hungary, Greece, Cyprus, the Czech Republic, Slovakia, Latvia, Italy and Poland. Slovenia's rank on the index of business competitiveness also fell and, amongst EU members, it ranks higher than the countries listed above, as well as Malta and Portugal. For the second consecutive year, the difference between the ranking of business competitiveness and GDP adjusted for PPS has increased, which the WEF interprets as placing Slovenia in a position in which the microeconomic fundamentals cannot support the attained level of income. The drop in Slovenia's growth potential ranking in 2004 is the result of lower values of the indices for technological competitiveness and the macroeconomic environment. Slovenia is ranked among peripherally innovative countries according to the technological competitiveness index, a ranking substantiated (in terms of indicators) by its low levels of foreign direct investment and technological transfers, inadequate technology policies, low competition levels for Internet services, poor government promotion of information-communications technology, and inadequate technology absorption amongst businesses. The deterioration of the macroeconomic environment can mainly be explained through the potential inefficiency of public expenditures, termed 'government waste' by the WEF.20 20 Government waste comprises three components: the scale of subsidies negatively affecting competitiveness; the extent of public resource redistribution; and the degree of public trust in the financial integrity of politicians (Development Report 2004, 2004). IMAD Development Report 2005 31 Preconditions for Implementing the Development Strategy 3. Mechanisms for implementing the development strategy A common feature underlying the mechanisms for implementing the development strategy is the concept of complex national competitiveness. The SEDS sets out the following main mechanisms for improving complex national competitiveness based on structural and developmental policy guidelines in the following fields: (i) transition to a knowledge-based society; (ii) boosting the economy's competitiveness; (iii) state efficiency; (iv) effective integration into the EU's single market; and (v) balanced regional and spatial development. 3.1. Transition to a knowledge-based society THE SEDS' OBJECTIVE: A knowledge-based society is characterised by a number of interrelatedfactors. They refer mainly to the creation and diffusion of knowledge to all spheres of the economy and society: for example, investing in education, research, technological development and innovation, transfer of research results into practice, using information and communication technologies. Only when the above factors are developed parallely can Slovenia become a knowledge-based society in the long run and, thus contribute to the sustainable development outlined in the SEDS. THE REPORT'S FINDINGS: The achievements in the development of a knowledge-based society show that although Slovenia has made progress in some areas (e.g. considerably higher enrolment levels in tertiary education, the business sector's R&D expenditure, access to the Internet), the gap in regard to the EU-15 has only been narrowing slowly. These modest shifts suffice neither for ambitiously closing the gap vis-à-vis advanced countries nor for swiftly modernising the economy, a fact especially evident in the low levels of innovative activity in enterprises and consequently in patent applications, where Slovenia's gap relative to the EU average is massive. The main deficiencies in the areas of education and training relate to its efficiency and quality, although the improvement of quantitative indicators has also been too modest. Unfinished institutional reorganisation and reforms in R&D, combined with sluggish implementation of the new regulations in the electronic communications market, are further hampering the move to a knowledge-based society. If such trends continue, especially considering the low innovation activity of enterprises, Slovenia's developmental prospects in the enlarged European Union will be jeopardised. ANALYSIS: The population's education and proficiency levels are the two key drivers for building a knowledge-based society. They are both interrelated with and dependent on other complementary factors such as investing in research and technological development, transferring research findings into practice, innovation, and the extensive use of information technology. Human resources, whose development is largely underpinned by education and training, are the basis of all developmental change. Knowledge (education) has become the key development IMAD Development Report 2005 32 Preconditions for Implementing the Development Strategy factor of the 21st century. Many experts believe that education and training is the only possible response to the challenges posed by modern technological and structural changes and the population's ageing since only lifelong learning can ensure active ageing. Slovenia appears well above the European average in this regard: 15.1% of the adult population in 2003 were involved in education and training, according to Eurostat's most recent survey, comparing favourably with the EU average of 9% and the 12.5% target set by the Lisbon Strategy. Since these data are not methodologically comparable with figures for the period prior to 2003, we cannot conclusively say that Slovenia has made any substantial progress. However, preliminary results obtained by the Slovenian Institute for Adult Education indicate that relatively modest headway has been made. With the increased involvement of youth in secondary and tertiary education, the education structure of the labour force is slowly improving although the progress since 2000. However, improvement measured by the average number of schooling years has been modest. Workers with a tertiary education most often find jobs in education and public administration. Slovenia has a relatively high share of adults with secondary education, while it lags behind in the share of the population with a tertiary education, which econometric analyses of economic growth factors (e.g. Gemmell, 1996) often identify as a vital development indicator. Slovenia's share of the adult population (those aged 25-64) with a tertiary education stands at 17.7%, compared to the EU-15 average of 21.2%. In this regard, the USA - in which 38.1% of adults have completed tertiary education - is considerably ahead of the European Union where countries with the highest recorded shares are Finland and Sweden (33.2%), Denmark (31.9%) and the UK (30.6%) (EIS, 2004, p. 11). Although the number of students (both full-time and part-time) per 1000 inhabitants has climbed to over 50, high drop-out rates and prolonged study durations are still a major problem in Slovenian tertiary education. Enrolment figures indicate that the progression rate from 1st to 2nd year standing ranged from 60% and 68% in the 1991-2001 period (Zgaga, 2004, p. 44), pointing to the relatively poor cost-effectiveness of tertiary education. Contrary to common estimates, the share of Slovenia's public expenditure in this area is in fact relatively high (1.36% of GDP, i.e. at the average EU level). The problem of protracted study durations was also addressed by Bevc and Lozar (2001) who, applying a longitudinal analysis, found that only 50% of a given cohort graduated within eight years, 6% required more than eight years, and 44% never received a degree. The long study duration may be partly attributable to the benefits of being a student. Total public expenditure on education in Slovenia is also relatively high (over 6% of GDP) and exceeds the EU average. According to data from 2001, only Denmark, Finland, Sweden, Norway and Cyprus spend more on education than Slovenia. The problem of inadequate quality in Slovenia's education system is pervasive at all levels. This is shown by the results of a functional literacy survey from both 1998 and a newer study, 'TIMSS 2003', on trends in mathematics and science competency among ten and fifteen year olds. Studies examining writing skills have shown that as much as 65%-75% of people (aged 15-65) do not achieve level 3 literacy, i.e. they are not capable of searching for and understanding information from different written sources and reusing it in new circumstances (Bevc, 2001, p. 30). The latest Trends in International Mathematics and Science Study survey IMAD Development Report 2005 33 Preconditions for Implementing the Development Strategy (TIMSS 2003) raises similar concerns as the share of pupils who attained the highest scores in mathematics in Slovenia was 4-times lower than the international average, 7-times lower than in England and 5-times lower than in Russia, Belgium, Lithuania, Latvia and Hungary (Ministry of Education and Sport, 2004).21 Combined with the relatively large amount of resources devoted to education, these findings indicate that Slovenia's main problems in its education system arise from its inefficient use of resources and insufficient quality. Education reforms should therefore be primarily oriented towards solving these problems. Since it is still too early to assess the results of introducing the nine-year primary school, the quality of instruction and the knowledge acquired by pupils should be improved in both primary and secondary education. Similarly, it is unclear how implementing the Bologna Declaration's directives will affect the efficiency and quality of tertiary education. Since 1996, Slovenia has been increasing its research and development expenditure measured as a proportion of GDP (with the exception of 1997 and 2002, when decreases from the previous year were reported). In the process, it has been slowly closing the gap relative to the EU-15, although the growth has been too small to rapidly approach the EU-15 average and even less so for achieving the objectives set in the SEDS (2% of GDP by 2006) or at the Barcelona summit (3% by 2010). In terms of gross domestic expenditure on R&D and the number of researchers per 1000 of the labour force, Slovenia is ahead of the other new EU member states and some of the old ones; however, this is not sufficient for a rapid convergence to the levels of the most advanced EU member states. The shifts seen in the structure of R&D expenditure were more favourable in the aforementioned period: the increase occurred mainly in the business sector's share, which financed 60% of total R&D expenditure in 2002. Nevertheless, the business sector's expenditure on R&D as a share of GDP is still much lower than in the EU-15. Moreover, the proportion of researchers employed in the business sector is too low despite the observed increase between 1996 and 2003. Although the financial resources allocated to R&D constitute only one of the many factors which influence the level of innovation in enterprises, these other factors also do not produce an environment conducive to innovation. Such factors encompass mechanisms for transferring knowledge from the research to the business sector (which includes protection of property rights), the availability of highly qualified staff in enterprises, environment conducive to the development of entrepreneurship and the availability of support services enabling the transformation of inventions into marketable innovations. Since the effects of these factors are not enhancing the innovation sufficiently, the share of innovation active enterprises is very low. Compared with the EU-15, where 44% of are innovation active, Slovenia has a share that is less than half (21.1%) and lags behind all EU-15 countries as well as many new member states. Although the gap vis-à-vis the EU-15 is wide in all size classes of enterprises and across sectors, it is especially critical in small enterprises and in the service sector (European Trend Chart on Innovation, Slovenia, 2004). 21 The TIMMS results also raise questions about the quality of science teaching and the interest in science studies in Slovenia, which is insufficient in view of the future development and needs of the economy. Further, the results of the study indicate that potential long-term emigrants amongst Slovenian researchers mostly specialise in technical, scientific, medical and biotechnical fields (Bevc, 2004, p. 84). IMAD Development Report 2005 34 Preconditions for Implementing the Development Strategy This calls not only for radical changes to create a more innovation-supportive environment but also for special measures targeted at boosting innovation activity in small enterprises and service providers. Given that the share of services in GDP is still rising, non-technical changes (organisational changes, new business models, new distribution methods) should also be considered in order to promote future development as these particularly affect innovation activity in service industries (EIS, 2004). The intensity of innovation activity is partly reflected in patents. Slovenia also lags well behind the EU in this respect, having filed just a quarter of the EU-25 average number of patent applications per million inhabitants in 2002 at the European Patent Office. Even though Slovenia is ahead of all the new and some of the old EU member states, it cannot anticipate any faster progress towards technological transformation without profound changes in this area. Although the government fosters technological development and innovation through various measures, studies have shown that funding for these purposes tends to be too dispersed - hence, it does not focus on the key priorities - and that there are too many different programmes, which hinders their transparency. On the other hand, these measures have proven to be useful since more than half of the projects22 would not have been realised without the development incentives (Final Report, 2004). Continued support for development-oriented projects will be crucial for a shift towards accelerated technological modernisation and increased value added per employee in the future. The unfinished institutional reorganisation and reforms in R&D are further hampering faster progress in this area. Although a new law on R&D, which establishes two new agencies to promote research and technological development, was already passed in 2002, so far only the Science Agency has been founded (in autumn 2004). Due to reorganisation of the ministries and the slow pace with which the Agency for Technological Development is being created, the establishment of an institutional framework to promote R&D and innovation is being delayed. Moreover, another obstacle (and one that stands in the way of achieving the EU's Barcelona objectives) is that, even after more than two years of preparations and negotiations, Slovenia still lacks a national R&D document to set out the priorities and promotional measures in this area. In the past few years, Slovenia has achieved relatively good results in building a modern telecommunications infrastructure and in the use of information and communication technologies (Stare, Kmet, Bucar, 2004). While household Internet access is at a similar level as in the EU-15, Slovenia lags behind in the share of Internet users among individuals. One reason for this disparity is Slovenia's lower share of the population with a tertiary education (a demographic group which tends to be more likely to use the Internet). The progress observed in introducing ecommerce has been sluggish, notably in commerce between enterprises and between enterprises and the government, while somewhat better results have been achieved in the provision of e-services for citizens. 22 Referring primarily to technology networks, clusters, technology centres, technology parks and incubators, investment in new technology, technological modernisation of enterprises, entrepreneurial incubators at universities. IMAD Development Report 2005 35 Preconditions for Implementing the Development Strategy Despite the favourable trends, Slovenia has regressed in some areas relating to the introduction of information and communication technologies (e.g. the decrease in investment in information and communication technologies as a share of GDP -EIS, 2004). In some other areas, its progress has been too slow (e.g. in introducing e-commerce) or it has not implemented legislation (e.g. in introducing competition in the electronic communications market, EC, 2004). Consequently, the potential of information and communication technologies has been exploited only to a limited extent, even though analyses have confirmed their positive impact on efficiency at the macro, sectoral and firm levels (OECD, 2003). The lack of highly qualified staff weakens the capacity of enterprises to innovate; similarly, an increase in education levels will be crucial for the more widespread use of information and communication technologies. This confirms the interdependency of the factors underpinning a knowledge-based society. 3.2. Strengthening the economy's competitiveness According to the SEDS' objectives, strengthening economic competitiveness encompasses the following: (i) creating a competitive business sector capable of quickly responding to changes in technology and in the global marketplace, as well as one which fosters competitiveness through an increased reliance on highly skilled human capital and a decreased emphasis on energy and natural resource usage; (ii) internationalising the business sector; (iii) promoting partnerships between small and medium-sized enterprises; (iv) developing an efficient financial system; (v) creating an efficient public sector by enhancing the role of private service providers and offering custom-made services; and (vi) creating an efficient non-tradable sector through price regulation, licensing and concessions. 3.2.1. Improving the business sector's competitiveness THE SEDS' OBJECTIVE: The SEDS proposes the following measures to strengthen the business sector's competitiveness: (i) conclude transition restructuring by consolidating ownership, and establishing ownership and corporate governance structures which will be efficient in the long-run; (ii) find a definitive solution for the loss-making companies without any prospects; (iii) create conditions for developing a competitive business sector, particularly by accelerating the entry of domestic and foreign firms, lifting administrative barriers to investment, stimulating the internationalisation of the economy, and by fostering the development of small and medium-sized firms. THE REPORT'S FINDINGS: An analysis of the factors relating to the competitiveness of the business sector in the Development Report reveals that structural reforms in the business sector are progressing too slowly. Despite growth in Slovenian market shares in foreign markets and steady growth in productivity, the restructuring processes in the Slovenian business sector lack the intensity needed for robust growth in international competitiveness. While labour costs per unit ofoutput are decreasing, they remain the highest in the European Union which indicates that the current IMAD Development Report 2005 36 Preconditions for Implementing the Development Strategy export structure is becoming increasingly unviable. The existing labour costs can only be sustained by the production of goods with higher value added, which naturally requires the accelerating of the restructuring process. Excessively slow structural reforms and the lack of competitiveness in the business sector are not conducive to foreign direct investment. A lack of firm entries pervades the business sector, with a decreasing number of entrants since 1999 and a below-average market success rate amongst entrants. ANALYSIS: Increasing the competitiveness of the business sector will be a key determinant of real convergence of the Slovenian economy with the European Union. Trends in the business sector's competitiveness can mainly be discerned through changes in productivity, market shares abroad and in the degree of structural change. Despite the unquestionable progress Slovenia has achieved in these areas, an increasing number of studies indicate that these changes are not occurring quickly enough, thus endangering the future competitiveness of the Slovenian economy in general and the business sector in particular (see, for example, WEF, 2004; IMD, 2003; Rojec et al. 2004). Among the 60 countries monitored by the IMD, Slovenia's rank for business efficiency fell from 36th to 51st place during the 2000-2004 period (IMD, 2004); among the 93 countries tracked by the WEF, Slovenia's rank for business efficiency fell from 27th place in 2002 to 30th place in 2004 (WEF, 2004). Existing studies propose that Slovenia should accelerate its structural reforms, continue internationalising its economy, strengthen the relationship between the business and research spheres, complete the privatisation of the services sector, and so on. The structural inviability of the Slovenian business sector is perhaps best witnessed through the bankruptcies and dismissals seen at labour-intensive firms. Labour productivity is one of the main indicators of an economy's competitiveness. The relatively high growth in labour productivity in the 1995-2000 period (averaging 4.7% per year; 6.9% per year in manufacturing) was followed by a cyclical fluctuation in productivity growth during the 2001-2003 period (ranging from 2.2% in 2001, 3.7% in 2002, and 2.8% in 2003). The cycles resulted mainly from the delayed reaction of employment dynamics relative to dynamics in the economic growth. Labour productivity growth was approximately 3.6% in 2004 according to our estimates. Slovenia's gap relative to average productivity in the European Union continues to close (Slovenia's productivity relative to the EU-25 average stood at 52.0% and 56.3% in 2001 and 2003, respectively). Labour costs per unit of output, an alternative indicator of competitiveness, suggest the situation is more problematic. While the 1995-1999 period witnessed a significant improvement in the relationship between labour costs and GDP per employed worker, the 2000-2003 period was characterised by fluctuations and only modest decreases in labour costs per unit of output (with increases of 3.2% and 0.1% in 2000 and 2001, respectively, and decreases of 2.0% and 0.5% in 2002 and 2003, respectively). Moreover, the decreases in labour cost per unit of value added were significantly higher in manufacturing than in the rest of the Slovenian economy (mainly non-tradable sectors). This points to the unfinished reforms and protectionism in the non-tradable sector (insufficient liberalisation, deregulation and privatisation)23 which brings about increases in labour costs and prices, whereas competition induces the manufacturing industry to 23 This is discussed further in Section 2.2: The completion of institutional reforms from the transition period. IMAD Development Report 2005 37 Preconditions for Implementing the Development Strategy constantly lower its costs (Rojec et al. 2004). Comparisons of trends in labour costs per unit of output with other EU countries yield two findings. First, the swift gains in the Slovenian economy's competitiveness in the second half of the 1990s slowed considerably during the 2001-2003 period; in the former, labour costs per unit of output in Slovenia fell, on average, by 2 p.p. faster than in the EU-25, while falling only 0.7 p.p. faster in the latter period. Second, Slovenia had one of the highest labour costs per unit of output among EU members in 2003. The share of wages in value added amounted to 60% in Slovenia (the EU-15 average is 56%, and 49% among new entrants), which is also the result of a higher tax burden on labour (data refer to 2002, Revue Regionale, 2004, p. 2). After the fall in Slovenia's market share in its most important trading partners from 0.58% in 1996 to 0.48% in 2000, this share began to climb again, reaching 0.54% in the first nine months of 2004. The growth in market share in the last four years indicates that, in the context of the considerable slowdown in the economic growth of Slovenia's most important trading partners, the relatively high growth of Slovenian exports after 2000 (with an annual 6% average real growth rate) is the result of the improved export competitiveness of Slovenia's economy. During the 2001-2003 period, Slovenia was ranked in the upper half of the EU-25 in terms of its growth rate in both global market share and market share within the European Union. The growth of its market share was faster than that of the majority of Euro area members, but much slower than the market share growth of a large proportion of other countries, particularly new EU members. One indicator of structural change is investment activity. After the transition depression ended in 1993, Slovenia's investment activity gained momentum, reaching its peak in 1999 when the share of gross fixed capital formation in GDP was 26.3%, 5.7 p.p. more than in 1995. Gross fixed capital formation relative to GDP declined from 2000 to 2003, falling to 23.9% in 2003. The trends in the technical structure of gross fixed capital formation in the 1995-2003 period indicate the following: (i) the share of gross investment in machinery and equipment, after a sharp increase during the 1999-2001 period, settled down at 10.5% of GDP; (ii) a similar trend occurred for housing investments which, after an increase in the 1996-2001 period, went back down to 3.4% (a figure which presumably increased in 2004, although official statistics are not yet available); (iii) the share of investments in non-housing construction relative to GDP was constantly growing during the 1995-2000 period and, after a fall in 2001-2002, increased to a record 9.1% in 2003 (compared to only 6.2% in 1995). While the share of gross fixed capital formation in GDP is larger in Slovenia than in more developed countries, Slovenia lags behind in its investments in housing and information technology. As expected, the share of investments in machinery and equipment is higher than in more developed countries. However, the relatively small share of investments in housing is surprising given the relatively low number of apartments24 and the fact that Slovenia is in the midst of implementing its National Housing Savings Scheme. Thus, there must be other explanations of 24 According to the UNECE (United Nations Economic Commission for Europe), the number of apartments per 1000 inhabitants in Slovenia in 2000 was lower than in most other EU countries: of the 18 member states for which data are available, this figure is lower only in Ireland, Slovakia, and Poland. Similarly, according to the Quality of Life in Europe study conducted by the European Foundation for the Improvement of Living and Working Conditions, Slovenia was placed last in the EU in the number of rooms per inhabitants in 2003. IMAD Development Report 2005 38 Preconditions for Implementing the Development Strategy the low housing construction levels although they are probably related to high prices, risk levels and limited land supply. Analysing the composition of merchandise exports according to factor intensity shows some positive developments; on the whole, however, these do not suffice for reducing Slovenia's structural lag behind the EU. Positive developments include a decrease in the share of products requiring the intensive use of natural resources (which has already reached EU-25 levels), as well as a sharp decrease in the share of labour-intensive products (from 25.6% in 1995 to 17.9% in the first nine months of 2004). Despite the decrease, the share of these products in Slovenian exports is still much higher than in the EU-25. Slovenia's structural surplus in its exports of labour-intensive products relative to the EU-25 decreased by only 3.8 p.p. in 19952002 A breakdown of exports based on technological intensity of products shows a sharp increase in the export share of high- and medium-technology products (from 14.8% in 1995 to 17.6% in the first nine months of 2004 for the former, and from 31.9% to 37.7% during the same period for the latter), although this was accompanied by a small increase in low-technology products (from 9.7% to 11.6% for the same period). These fundamentally favourable trends mask some less positive aspects -most notably, that Slovenia's structural lag behind the EU-25 with respect to high-technology products increased during the 1995-2002 period. During this period, however, its structural advantage in medium-technology products increased. Thus we can see that restructuring in the EU-25 is mainly emphasising the development of high-technology industries while Slovenia has been developing its medium-technology industries. The guidelines set out in the SEDS mandating an increase in exports based on created factors of competitiveness are therefore being satisfied mainly through a decrease in the share of labour-intensive products and an increase in the shares of high- and medium- technology products. However, the structural lag behind the EU-25 persists as the Slovenian economy has a significantly higher share of labour-intensive products and an increasing structural lag in the high-technology sector. The latter must be partially associated with Slovenia's lag in terms of the share of innovation active firms.25 Analysing the structural changes in domestic and foreign-owned manufacturing firms in the Czech Republic, Estonia, Hungary, Poland, Slovenia and Slovakia indicates that Slovenia ranks among those countries which were relatively slow to restructure and, in particular, that were least likely to incorporate foreign direct investment in the restructuring process. Analysis shows that the restructuring processes in manufacturing sectors of the analysed countries were largely driven by foreign-owned firms, which were significantly more likely to become involved in medium-high- and high-technology sectors. In the 1993-2001 period, the structural share of high-technology industries in total value added created in manufacturing in the analysed countries increased by 1.3 p.p. among domestically-owned firms and 14.3 p.p. among foreign-owned firms (in Slovenia, only by 1.7 p.p.), while the structural share of medium-high-tech firms increased by 1.5 p.p. among domestically-owned and 7.9 p.p. among foreign-owned firms (in Slovenia, the relevant figure decreased by 12.7 p.p.). Among all the countries analysed in the study, it was precisely Slovenia that harnessed the potential of foreign direct investment the least (Damijan and Rojec, 2004). 25 The findings are presented in Section 3.1: Transition to a knowledge-based society. IMAD Development Report 2005 39 Preconditions for Implementing the Development Strategy The SEDS considers intemationalisation as crucial for development and increasing the competitiveness of the business sector. The share of exports and imports as well as inward and outward foreign direct investment (FDI) in GDP are the most basic internationalisation indicators of an economy. The stock of incoming FDI in GDP increased from 9.5% to 20.7% in the 1995-2003 period, while the stock of outgoing FDI in GDP increased from 2.6% to 7.5%. After a large increase in FDI inflows in 2001 and 2002 which resulted from several large foreign acquisitions, inflows in 2003 and 2004 returned to their pre-2001 levels. FDI outflows from Slovenia have been constantly increasing, leading Slovenia to become a net direct foreign investor in 2003 and 2004, an unusual situation for a country at its level of development. These trends point to the increased importance of FDI for the incoming and outgoing internationalisation of the Slovenian economy, but they also reaffirm the fact that Slovenia is incapable of attracting new, greenfield FDI. A comparison with EU countries indicates that Slovenia remains among those countries with the lowest stock of inward FDI in GDP. Slovenia ranks somewhat better compared to new EU member states in terms of its outward FDI. Thus, despite the swift increase in FDI in 2001 and 2002, Slovenia still ranks among countries with a relatively limited degree of internationalisation through FDI (in 2003, its global stock of inward FDI was 0.0769%, and 0.0282% for outward FDI). Its degree of integration with the global economy is much greater in terms of its exports since Slovenia's share of total exports in 2003 amounted to 0.1699%. In 2003, Slovenia increased its share in each of the three indicators over the previous year. The success with which a country attracts FDI can be measured by the degree to which it exploits its potential for attracting FDI. This can, in turn, be measured by comparing its ranking on the index of potential for attracting FDI and its rank in success in attracting FDI. Slovenia's actual success in attracting FDI has lagged considerably behind its rank for its potential. Slovenia's rank according to its potential for attracting FDI among 140 countries improved from 45 th to 27th place among 140 countries during the 1995-2002 period, while its rank in the index measuring actual success in attracting FDI dropped from 94th to 109th place; an improvement was not witnessed until 2002 (to 59th place), and even this occurred mainly as a result of unique factors resulting in extremely high FDI inflows (several larger acquisitions from abroad - UNCTAD, 2004; Stanovnik and Rojec, 2004). The business environment is ill-suited not only for FDI but also for the creation of new domestic firms. In fact, Slovenia is experiencing a fall in the number of firms, which decreased by 10,000 from 1999 to 2003, a 10% drop (SORS, 2004). The GEM26 study of entrepreneurship (Rebernik et al., 2004, 2005) finds that Slovenia's score according to the TEA index27 of 2.6 in 2004 places it only in 22nd place among the 34 countries worldwide in the study. The mortality ratio28 in 2004 stood at 2.72 (compared to 2.14 in 2002), meaning that only one in 2.72 newly-created 26 Global Entrepreneurship Monitor, Slovenia, 2002. 27 The TEA index (Rebernik et al., 2002, p. 7) measures the share of adults aged 18 to 64 who are either in the process of establishing a company or are the owners/managers of a young company that has not been paying wages for more than 42 months. 28 The mortality ratio (Rebernik et al., 2004, pp. 14 and 46) originates from the relationship between TEA companies in the process of being created and TEA new companies. IMAD Development Report 2005 40 Preconditions for Implementing the Development Strategy firms survive at least three-and-a-half years. The low level of entrepreneurial activity and the high mortality rate - one which places Slovenia among entrepreneurially undeveloped countries in a European and global sense - point to excessively high and unrealistic entrepreneurial expectations on one hand, and to high barriers in the entrepreneurial environment on the other. 3.2.2. Financial sector THE SEDS' OBJECTIVE: Slovenia's gradualist approach to financial sector reforms has had an inhibiting effect over the lastfew years. The basic purpose of the reform process is to improve thefinancial sector's international competitiveness and enable it to effectively integrate into the EU's common financial market. Achieving this requires a balanced development of all the elements in a financial market. The SEDS distinguishes between three groups of measures for further restructuring: (i) establishing a competitive structure and completing the restructuring process, including privatisation; (ii) completing the process of regulation enforcement and control; and (iii) harmonising the related legislation with the acquis communautaire. THE REPORT'S FINDINGS: While Slovenia is one of the most developed new EU member states according to the basic indicators of its financial system's development, it is still well behind developed EU member states. After several years of a gradual decrease in its gap relative to these countries, the gap has expanded in the past year. Slovenia lags behind similarly developed countries in terms of its financial sector's development (including Greece, Portugal, the Czech Republic, Cyprus, and Malta). Banks are the key financial intermediaries in Slovenia's financial market yet their assets as a proportion of GDP do not even amount to one-third of the EU-25 average. A large, albeit smaller, gap remains in the insurance industry (measured as the amount ofpremiums as a share of GDP). The capital market's development is also lagging behind, in part due to the fact that several large firms' stocks were withdrawn from the stock exchange in 2003, significantly decreasing the growth in market capitalisation as a share of GDP. Reforms are being effectively adopted only in the areas of regulation, supervision and alignment of Slovenia's legislation with EU directives. In order to boost the efficiency of the financial system, however, further privatisation will be imperative since this would establish a stable ownership structure for the main financial intermediaries. ANALYSIS: Even though the Slovenian financial market development indicators are improving from year to year, a considerable development gap with more developed countries persists. The gap, measured by the total banking assets as a proportion of GDP, has in fact increased somewhat relative to the previous year. The poor development of the financial sector is apparent when comparing its inferior indicator values to those of similarly developed countries (including Greece, Portugal, the Czech Republic, Cyprus, and Malta). Banks are the key financial intermediaries in Slovenia's financial market, but the value of the indicator measuring their total banking assets as a proportion of GDP does not even amount to a third of the EU-25 average. The smallest developmental gap is seen in the insurance sector, a fact resulting from the high share of non-life insurance policies among total insurance premiums. The capital market's development is also lagging behind, in part due to IMAD Development Report 2005 41 Preconditions for Implementing the Development Strategy the fact that several large firms' stocks were withdrawn from the stock exchange in 2003, significantly reducing the growth in market capitalisation as a share of GDP. The savings patterns of the population are clearly changing as bank deposits are increasingly only very slowly, while investments in mutual funds and life insurance are rapidly increasing. Reforms are being effectively adopted in the areas of regulation, supervision and alignment of Slovenia's legislation with EU directives. In order to boost the efficiency of the financial system, further privatisation is imperative since this would establish a stable ownership structure for the main financial intermediaries. Banks held almost 60% of the assets of the entire financial sector at the end of 2003. The value of the indicator measuring total banking assets as a share of GDP has been rising from year to year, increasing by 2.3 p.p. over the previous year to reach 88% in 2003. In 2001 and 2002, the growth in assets was mainly the result of investments in securities (largely securities issued by the central bank), while increases in bank assets in 2003 and 2004 were fuelled by the issuance of credit to non-bank customers (foreign-currency-denominated loans to firms and other financial organisations and tolar-denominated household loans). The amount of securities began to fall in 2004 largely due to the changed monetary policies of the Bank of Slovenia arising from entry to the ERM II. The increase in credit issuance resulted largely from interest rate decreases,29 which have been dropping since the second half of 2002 when the indexation of short-term assets and liabilities was abolished, while the indexation of long-term assets and liabilities remains in place. Despite this fact, long-term interest rates fell, as the indexation factor (TOM) is lower than in previous years and the decrease was also influenced by a drop in the real interest rate. These interest rate trends negatively influenced interest revenues and decreased savings flows into banks. Banks reacted to these savings trends by expanding their traditional offerings to include investment banking services, new forms of saving, e-banking services, banking via the phone and bank assurance services. Thus, the revenue structure of Slovenian banks has been changing accordingly, seeing an increase in the share of non-interest revenue. These new forms of saving have enabled banks to acquire more long-term assets, which is very important for the adjustment of the term structure of banks' balance sheets. Banking services are increasingly being integrated with the services of the other two segments of the financial intermediary sector, that of insurance and the capital market. Thus, in 2003 the share of insurance premiums collected by banks stood at 5.8%, while banks created more than half of the turnover on the Ljubljana Stock Exchange. Among new EU members, Slovenia registered the highest value of the indicator for the amount of insurance premiums relative to GDP, with 5.2% in 2003 (among other EU members, Luxembourg and Greece also have lower indicator values), but this figure still only amounts to about 60% of the EU average. A comparative analysis indicates that Slovenia's non-life insurance sector is well developed (at 4% of GDP it amounts to 110% of the EU average), while the life-insurance sector is not (at just 1.2% of GDP it only amounts to about a quarter of the EU average). The latter has been increasing faster than the former for several years, attaining an annual real 29 The higher consumer debt in 2004 also resulted from the National Housing Savings Scheme and the payment of debt issued in 1999, thus resulting in a new cycle of borrowing. IMAD Development Report 2005 42 Preconditions for Implementing the Development Strategy growth rate of almost 20 percent in the past ten years, increasing by 9.5 p.p. to 23.5%. A similar increase in the share of life-insurance can be expected in the future, particularly due to the growing importance of saving for retirement, the expanded offers from foreign insurers, and the integration of banking and insurance services. The ownership restructuring procedure for the largest insurer began in 2003.30 Creating a stable ownership structure will be a key goal of privatisation since that would improve the accessibility of capital needed for swifter development. The latter will, in turn, improve the competitiveness and efficiency of the Slovenian insurance sector within the financial system of the European Union. The capital market's development is also lagging behind that of the European Union. The indicator of market capitalisation as a share of GDP stood at a little over one-third of the EU-25 average in 2003, at 23.3% of GDP - 0.1 p.p. more than the previous year. This indicator value locates Slovenia in the lower half of new EU members. Higher values were attained by Estonia, Malta, Cyprus, Latvia and the Czech Republic. The main underlying reason can be found, as in previous years, in the withdrawal of several acquired firms. However, its growth was also stunted by a fall in stock prices during the first half of the year, resulting in the annual growth of market capitalisation of 8.6%. Even less developed is the primary capital market in which government securities dominate and initial public offerings basically do not exist. In order to remain feasible and successfully develop, it will be necessary for the Slovenian capital market to become better linked to foreign institutions, accelerate the primary market's development and list more companies on the stock exchanges (to give institutional investors more investment options in the domestic capital market). Important parts of the financial sector - banks and insurers - remain in government hands and thus the privatisation processes currently underway need to be accelerated so as to establish the conditions for faster growth in the sector's efficiency. Further reforms regarding the establishing of a common EU financial market31 are needed (mainly in the areas of regulations and oversight). The reforms must fully exploit the potential benefits of the European Monetary Union. 3.2.3. Infrastructure THE SEDS' OBJECTIVE: The strategic goal of developing the economic infrastructure is to ensure reliable, cost-effective service in the energy, transport, telecommunications and local utility sectors. The main priorities are: (i) the continuation of economic infrastructure construction; (ii) the liberalisation and privatisation of infrastructure; (iii) the entry ofprivate capital into infrastructure construction and financing; and (iv) the provision of quality economic infrastructural services to companies and the population at large. 30 Based on the Law on Insurer Ownership Restructuring, the government issued two declarations in 2003, one for resolving the capital structure for the Triglav Insurance Company and the other for determining the capital shares in the nondenominated capital of the Triglav Insurance Company and those entitled to those shares. 31 The Financial Services Action Plan, ratified in 1999, outlines the requisite measures for establishing a common financial market. The European Commission monitors implementation of this plan semiannually. IMAD Development Report 2005 43 Preconditions for Implementing the Development Strategy THE REPORT'S FINDINGS: After several years of decline, investment in infrastructure construction has increased recently (in 2003), mainly in the area of road infrastructure. Private capital is still not involved in the construction and financing of investments, although preparations are underway to raise private funds through bonds. The liberalisation and privatisation of infrastructure achieved no progress in the past year, although the EBRD estimates the pace is comparable with the average in other new EU entrants. Independent regulators (agencies) have been largely established, but start-up difficulties have resulted in operational inefficiencies that need to be improved. Liberalisation and privatisation have not yet significantly affected the quality of supply nor have they increased competitiveness. ANALYSIS: In previous years, Slovenia began to liberalise its network activities32 which will presumably increase the number of competitors and improve product variety for consumers on one hand, and force firms to rationalise, improve the quality of their services and lower their prices on the other. The Slovenian telecommunications market is relatively small, constituting only 2.6% of GDP, the lowest share among all new EU entrants.33 From 2001 and 2003, the market grew by approximately 8%.34 This growth was particularly pronounced in the mobile telephone segment where 93% of the population were already mobile phone users by 2004, while there were 41 land lines per 100 inhabitants.35 36 The market penetration of mobile phone users in Slovenia is about 10 p.p. higher than in the EU, and mobile telephony is more developed in only 6 member states. Prices in land-line telephony are low compared to other EU countries, as are prices in mobile telephony. Competition is present in all sectors of the telecommunications market with the exception of land-line telephony for internal calls, where the monopoly has been abolished by law, but not quite yet in practice. Permits for providing these services were already obtained by two operators in 2002, and five more have obtained them since the Electronic Communications Act was adopted in April, 2004. An important form of competition for the national operator, Telekom Slovenije, comes via the Internet protocol (VoIP, with 22 operators) and the operators of international wireless networks who offer to forward international calls (11 operators). In the area of mobile telecommunication services, Slovenia has three mobile telephone providers (two have significant market power). The largest one has a 76 percent market share which, with the exception of Cyprus (where one provider has a perfect monopoly), is significantly more than in other EU countries where the largest player typically commands less than half of the market. Ten narrowband Internet providers operate in the market (none have a majority market share; the new operators control 56% of the market), while broadband access is available via ADSL (Siol controls two-thirds of the market) and cable networks. Cable Internet already has approximately 8,000 subscribers. 32 Reforms are described in greater detail in the Report on Structural Reforms, October 2004, pp. 8-13. 33 4th Report on Monitoring of EU Candidate Countries, 2003. 34 10th Report, European Electronic Communications Regulation and Markets, 2004. 35 Study on the Use of Information-Communication Technology IKT, 2004. 36 The degrees to which the population is equipped with information-communications gadgets in 2004 are as follows: 98% of households had television receivers; 90% had land-line telephones; 87% had mobile phones; 58% had a personal computer; 55% had cable TV; and 47% had Internet access. IMAD Development Report 2005 44 Preconditions for Implementing the Development Strategy In addition to the Slovenian Postal Service, which is the main and sole provider of general postal services, five minor suppliers operate in the field of courier services. Slovenia is a well-developed European country in terms of the number of square kilometres and population per one post office (Postal Outlook, 2004), covering 3,585 people and 36.4 square km (compared with 4,943 people and 66.2 square km on average in the EU).37 Slovenia aligned its legislation with the acquis through the 2002 Law on Postal Services (and the ensuing amendments and supporting clauses). The market was liberalised as legal obstacles to the entry of competitors were abolished and a public service for universal postal services was established to provide users with basic postal services at affordable price. The role of independent regulator has been given to the transformed Post and Electronic Communications Agency. Mandatory state economic public companies for environmental protection are comprised of agencies for dealing with radioactive waste, incinerating municipal waste, dealing with animal waste, collecting, processing and removing other types of waste, carrying out measurements, monitoring and cleaning heating devices, chimney and air vents, monitoring hydrological, geological, seismological and other geophysical events and monitoring the state of the environment. Ensuring the provision of municipal services is the responsibility of local governments. Public environmental protection companies - which are responsible for the public services of providing potable water, wastewater collection and treatment, and solid waste management and disposal - have been carried out by 62 contractors on average in recent years (of which 51 carried out all four main functions). Most providers are public enterprises or mixed organisations and the rest are concessionaires in private or mixed ownership. The present organisation of public services is inappropriate, as shown by the inefficient organisation structures and excessive number of companies dealing with local utility services. Establishing the conditions for improved efficiency and professionalism will require better oversight of the cost efficiency and joint investment by several municipalities, which requires increasing the public service providers' area of operation. In addition to their public services, the majority of providers in Slovenia operate other (profit-making) ventures which often results in insufficient transparency of their basic public service. The Rules on the pricing of services provided by the mandatory municipal public utility services in the field of environmental protection adopted in 2004 should resolve this problem by more clearly delineating between the different costs incurred by these firms. Deregulation of the electricity sector has separated the activities of production, transmission, distribution and supply. Beginning on 1 July, 2004, the electric energy market was liberalised for all users other than households. The number of users entitled to freely choose their supplier has grown significantly from the previous figure of 8,000. Total energy use among these eligible customers - combined with the new, smaller ones - increased from almost 68% to approximately 75% of total Slovenian electricity consumption, which indicates the degree of the market's openness. Half of all electricity is produced by the Holding Slovenske elektrarne (HSE),38 40% by the Krsko Nuclear Power Plant and the remaining 10% by two 37 Annual Report of the Slovenian Postal Service 2002. 38 Large public hydro-electric power plants and two thermal power plants have operated within the HSE since summer 2001. IMAD Development Report 2005 45 Preconditions for Implementing the Development Strategy large thermal power plants and several smaller producers. Slovenia has five regional distribution companies and one transmission company. After a public tender in 2003, 16 eligible customers and five electricity producers were granted access to international transmission lines (some were later also granted so-called uncertain capacity rights). The Slovenian part of transmission capacities was granted according to published guidelines using a capacity pro-rating, which will be in use after the changed EU regulations commence on 1 July 2007. The prices of electric energy for eligible customers39 increased for some categories of users in 2003 and 2004, but decreased for others. The price for tariff users increased by 3.9% on 1 May, 2003, with a further 4.0% increase on 1 February of last year. The average price of Slovenian electricity before tax for a consumer with 3500 kWh of annual usage was 6.4% lower than the unweighted EU-25 average in January 2004, while the price for an industrial user with 2000 MWh of annual usage exceeded the European average by 0.7% (Povsnar, 2004). Quantities traded on the daily electricity exchange market rose by 45% in 2003 relative to 2002 and totalled 3.1% of Slovenian energy use. By adopting the changes and supplementary clauses of the Energy Law in April 2004 Slovenia appropriately modified its legislation to suit the common market directives regarding natural gas. As a result of these legislative changes, the activities of the gas transmission network system operator will be legally and functionally separated from other market activities. Access to the network is no longer negotiated, but regulated. The methodology for pricing network access, transmission and distribution costs has already been determined by the Energy Agency of the Republic of Slovenia, as sanctioned by the government. Beginning 1 July 2004, all non-household users became eligible natural gas users while household-users will gain this right on 1 July 2007. Despite the 50% openness of the market that started on 1 January 2003, only one supplier and distributor exists for larger industrial users but this firm has not been the gas transmission network system operator since 1 January 2005. Most larger energy users have a long-term natural gas contract with this supplier until 2007. In railway transport, freight transport operates as a market activity while internal passenger transport operates as a public utility. Access to the public railway infrastructure is unrestricted in a similar way as in the European Union. Licenses for engaging in railway transport issued in the EU are also recognised in Slovenia. The Slovenian Railways Company, which has been reorganised into the Slovenian Railways Holding Company, is in practice still the only carrier in Slovenia. This holding company is comprised of three legal partnerships, each governing different parts of its operations: passenger traffic, freight, and management and public railways infrastructure maintenance. A business reorganisation of the Slovenian Railways Holding Company was also undertaken. The Directorate for Railway Traffic was reorganised into the Public Railway Traffic Agency, becoming the infrastructure manager. Freight carriers in road transport also operate as independent market participants and Slovenia's entry to the EU means that Slovenian carriers can now operate in the common EU market more competitively and without the many previous restrictions and barriers.40 In the area of public passenger transit, a new law passed 39 SI-STAT Database, SORS. 40 Various permits, prohibition on foreign carriers to haul freight internally etc. IMAD Development Report 2005 46 Preconditions for Implementing the Development Strategy in 2004 governing concessions for operating public passenger transport along established routes in internal traffic, and concession contracts for the period until 2008 have already been signed. Such companies had previously received a SIT 50 bonus per kilometre travelled (EUR 0.2, representing more than a two-fold increase over the previous subsidy) but, beginning in January 2004, this bonus depends on the difference between costs and revenues for various routes, calculated for kilometres travelled. Thus Slovenia has progressed from a system of subsidising public passenger transit into one of implementing and co-financing public services for carrying out this activity. In 2004, a new state company owned by the government for operating navigational services in air transport was formed and thus the regulatory duties and public services functions have been separated. Regarding sea transport, the first concession agreement was reached with the Luka Koper company in 2003 to manage, develop and maintain the harbour infrastructure for Slovenia's only port in Koper. 3.3. Improving state efficiency THE SEDS' OBJECTIVE: The state fulfils its developmental role in three main ways: (i) it sets and enforces the main rules of economic activity by protecting economic agents' rights and engaging in contract enforcement (through an effective legal system) and by establishing a framework which enables the market to function efficiently (through competition policy); (ii) it manages economic resources directly as the owner or supervisor of public and mixed companies, as the manager of public systems (health, education etc.) and as the manager of public resources (general government revenues and expenditure), and indirectly through regulations and financial instruments, with which it oversees independent economic initiative and influences the allocation of resources; and (iii) it ensures that itfunctions efficiently internally in its management and co-ordination of economic and development policies. THE REPORT'S FINDINGS: In terms of the rules governing economic activity, court backlogs continue to decrease quite rapidly in general and in the realm of the land registry, a problem mentioned in our previous reports. However, backlogs continue to grow in the economically crucial area of court order enforcement. Competition policy remains institutionally weak even though the Competition Protection Office has had its mandate broadened. Regarding the management of economic resources, the trend of increasing public finance expenditures has been stopped, but expenditure on wages and transfers continues to grow which has necessitated decreases in investment expenditure, an unfavourable outcome for development. Positive changes have occurred in the structure of state aid in 2003, with a decrease in agricultural goals and an increase in aid aimed at horizontal goals, in particular R&D, as well as industry. Remaining weaknesses include an insufficient consideration of regional goals and a lack of aid to directly support regional developmental goals. The state's organisational and operational efficiency - in which improvements were deemed crucial for national competitiveness last year - has improved in terms of the quality of both public institutions and the business climate. IMAD Development Report 2005 47 Preconditions for Implementing the Development Strategy ANALYSIS: Rules of economic activity. In 2003, the number of court backlogs continued to fall in important areas (the magnitude of the decrease, 10 percent, is similar to that achieved in the previous year). A positive development is that land registry backlogs decreased for the first time, a result likely attributable to the use of information technology. However, the rise in backlogs of less important areas continues to be troublesome, particularly in the economically crucial area of enforcing court orders, which constitute almost half of all court backlogs. As emphasised in previous reports, such long backlogs in enforcement raise transaction costs and decrease legal security, hurting social welfare by reducing the number of transactions in the economy. We estimate that the direct cost of these backlogs amounts to approximately 0.3% of GDP.41 The efficiency of the judicial system is related to its institutional setup. The number of resolved court cases dropped significantly in the 1990s, particularly after the 1995 judicial reform. This period was accompanied by a decrease in the number of court judges. The situation of the early 1990s has still not been restored despite positive shifts in resolving important cases since 1998. The legal changes adopted in mid-2004 are thus welcome developments in the further cutting of backlogs. The new Courts Act introduced legal aides intended to help judges with their 'nonjudicial' duties; the legal means for case-management complaints are also to be strengthened in an attempt to create incentive for cases to be settled within a more reasonable timeframe; and a new Centre for Judicial Education will be established with the aim of constant and comprehensive educating of judicial employees. The new Judicial Service Act puts a limit of maximum two assignments of judges to a case, a measure that would shorten many of the unnecessary delays witnessed in practice. To address the considerable differences seen in the efficiency of various courts - partly resulting from the discrepancy in the number of judicial employees in certain types of courts and the demand for them - it would be sensible to attempt to forecast trends in types of court cases and to thus improve the respective allocation of financial and human resources. Despite gradual changes in antitrust policy, the conclusion that this area is institutionally under-developed is still valid, both from the perspective of capacities and the jurisdiction of the relevant authority. The new Minor Offences Act, with which the Competition Protection Office acquired jurisdiction to impose sanctions, is a welcome development. In the legal processes, emphasis continues to be placed on industry concentration. In 2003, 54 of the 63 legal notices issued by the office were based on this measure. The structure of these cases is changing with greater emphasis being given to hearing more complex cases of antitrust infringement such as cartel agreements or the abuse of a dominant position. Managing economic resources. No new data are available again on the share of the public sector in the economy, but we estimate that the state's indirect influence on the economy has changed little because there have been no major sales of state-owned assets or significant institutional changes. The share of monitored prices in the consumer price index has not changed. 41 The calculations are described in the Analytical Appendix under the Court Backlogs indicator. IMAD Development Report 2005 48 Preconditions for Implementing the Development Strategy The share of public finance expenditures relative to GDP remained essentially constant last year, which is a positive development after the significant increase in 2003. The expenditure levels have thus increased by only 0.1 p.p. since 2001, while they increased by 2.9 p.p. from 1996 to 2001. Despite these positive trends in public finances, they are still not in accord with the goals of the SEDS which prescribed an upper limit of 43% of GDP. Such a figure would - based on later methodological changes in the GDP calculations - translate to 41% of GDP today. The SEDS also assumed that public finances would be balanced without an increase in the total fiscal burden, but in fact the decrease in the government budget deficit was accomplished almost exclusively through an increase in revenues as a share of GDP. Concurrent with the halt in the growth of public finance expenditures as a share of GDP in recent years came significant changes in their structure. A larger share of expenditure is now devoted to wages, even in 2004 and despite the decrease in the average real wage per worker, which reflects the continued growth in employment. Increases also occurred in the share of expenditures for transfers to the population. Last year, a new item on the list of expenditure included payments into the EU budget amounting to 0.7% of GDP. The biggest burden of these changes was borne by government expenditures on goods and services, and the situation was ameliorated by the results of the pension reform since the share of expenditure on pensions has been consistently decreasing since 2000. Investment expenditures and interest payments also dropped somewhat last year, the latter for the first time. The shifting structure of expenditures is not conducive to development and indicates that changes in the wage and transfers indexation mechanisms are insufficient for addressing the main expenditure problems. Thus, the flexibility of employment in the public sector must improve, wage determination will need to be tied to efficient human resource management, the target efficiency of social transfers must improve, and investments must rely more on European funds and public-private partnerships. The quality of public finances and developmental policies can also be evaluated through an analysis of state aid. The changes in its structure tended to be positive and also reflected the advice from previous Development Reports. After several years of increases, state aid for agriculture thus decreased while state aid for the manufacturing and transportation sectors increased. The share of horizontal aid also increased, constituting more than 75%, meaning that the EU-15 average of 50% has already been surpassed by a large margin. State aid increased for the following purposes: aid for rescue and restructuring, research and development, small and medium-sized enterprises and the environment. Current remaining weaknesses lie in the underutilisation of the regional aid criterion (only 3.7%) and, within the manufacturing industry, an excessive focus on low-tech activities. Although this indicates that the state was reacting to the difficulties certain sectors face due to their lack of competitiveness upon EU entry, Slovenia will achieve more rapid restructuring only by channelling part of its aid to more developmentally viable activities. From the viewpoint of the SEDS' directives for establishing a knowledge-based society, the state aid most conducive to development is that earmarked for training, R&D and the development of information technology. Progress has been made IMAD Development Report 2005 49 Preconditions for Implementing the Development Strategy chiefly in the area of R&D aid, although aid for highly technologically advanced telecommunications has also increased.42 In terms of the SEDS' directives for lifting the competitiveness of the economy, the most important state aid comes in the form of investments, supporting small and medium enterprises, and creating new jobs. Investment aid is very meagre,43 as is aid for small and medium enterprises. State aid for job creation has also been quite scarce.44 Instead of giving aid which would accelerate competitiveness, 2003 in particular was characterised by aid for failing firms - thus, aid which does not foster competitiveness or economic growth. Achieving the strategic goals will thus require not only retaining the current level of state aid but also changing its structure. Channelling state aid towards development will require reducing aid for sectoral goals and other purposes that do not support the goals of competitiveness and economic growth (rescue and restructuring, untargeted tax breaks and exemptions, covering various extraordinary costs and other purposes intended either as income support systems or as aid to preserve the existing business), and increasing funds for purposes that foster competitiveness and economic growth (R&D, training, small and medium enterprises, start-up investments and new job creation especially in high-unemployment areas). Regarding the aid recipients, it would be advisable to direct most of the aid towards the most developmentally viable activities. Among services, these would include the business, financial and information services and tourism; in manufacturing, these would include firms from high or medium-tech industries and viable firms in less technologically advanced industries. Research and development funds should be directed more towards projects which stimulate co-operation between research, higher educational and health institutions and firms, thus accelerating the transfer of knowledge to firms and their innovation activities. The state's organisational and operational efficiency. While the inefficiency of the state in 2003 was a key reason for the decrease in Slovenia's international competitiveness according to the WEF analysis, 2004 offered some improvements in this regard. The value of the public institution quality index increased significantly, jumping 4 places in its rank in this area. Significant improvements also occurred in the area of corruption, while critical problems remain in the areas of legal and contractual safety. Business environment quality improved by two places. Further, the latest report highlights the gap in technological development and innovation. This problem is naturally directly related to the state's efficiency in redirecting government aid to applied research based on clearly stated priorities. 42 Aid for R&D among all government aid increased from 4.9% in 2001 to 8.6% in 2003. The share of aid for basic research dropped from 52% in 2001 and 2002 to 49.5% in 2003, while the share of industrial and manufacturing-related research increased. There has also been a favourable increase in the share of research aid for firms (comprising only a quarter in 2001, but a third in 2003), while the remaining resources are still dedicated to research, university and health institutions. Aid for training, which also encompasses general and special training for workers employed by firms as well as guidance counselling, constitutes a minimal share of the government aid (ranging from 1.7% in 2001 to merely 1.3% in 2003). 43 2001: 6.1%, 2002: 2.8% and 2003: 4.9% of all aid. 44 Aid for this purpose among total aid fell from 4.8% in 2001 to a mere 2.7% in 2003, which is mainly the result of lower aid in the form of social security contribution exemptions. IMAD Development Report 2005 50 Preconditions for Implementing the Development Strategy 3.4. Balanced regional and spatial development THE SEDS' OBJECTIVE: According to the SEDS, balanced regional and spatial development constitutes an integral part of development. The guiding strategic principle in regional development is that national development is subject to a regional balance, and the main goal of regional policy is to improve regional development potential through local oversight, focusing on the welfare of all of Slovenia s regions, but giving priority to areas with large current deviations from these goals. The main goal in spatial development is to activate space as a production factor and protect it from wasteful exploitation with the appropriate systemic, institutional and instrumental means. THE REPORT'S FINDINGS: Regional disparities in levels of economic development are relatively low compared to other EU members, and they have stayed unchanged over the lastfew years. The disparity in GDP between the most and least developed regions has increased slightly, while the differences in unemployment rates have been decreasing since 2002. The most significant problems in both levels of development and unemployment remain in the Pomurska region, while the development gap has increased in other regions, in particular Zasavska and Savinjska. Central Slovenia is the most developed, having already attained 98% of the EU-15 average. Certain progress thus appears to have been attained in terms of spatial development, although not on a sufficient scale to meet the SEDS' goals. ANALYSIS: Balanced regional development. Slovenian regional policies have achieved some positive results, although unrealised potential remains (Report on the Execution of Regional Policies 2004, 2004, p. 7). Variation in gross domestic product per capita, measured by the variation coefficient,45 has been increasing slightly since 1995. The variation coefficient in 2002 was 2.3 p.p. higher than in 1995 and stood at 25% for 2000 and 23.3% for 2001. If we exclude the most developed (highest GDP per capita) Central Slovenia region, the coefficient of variation drops to about 15%. This suggests this region serves as the core of the national economy and that it significantly contributes to the regional disparities in Slovenia. Since 1995, the two regions with above-average levels of GDP per capita were the Central Slovenia (42% above the average in 2002) and the Obalno-kraska region (3% above the average in 2002). Goriska is also close to the average, falling behind the average by 3.3% in 2002 (in 1997, its gap was only 0.9%). During the entire period, the lowest GDP per capita was seen in the Pomurska region which achieved only 69% of the national average in 2002, and whose gap has increased by 7 p.p. since 1995. The gap relative to the Slovenian average from 1995 to 2002 increased the most in the Zasavska region (by 11 p.p.), mainly the result of the closure of lignite mine. The gap vis-à-vis the Slovenian average also increased in Savinjska, Gorenjska, and Notranjsko-kraska. The regions that reduced the gap the most are Podravska (by 3 p.p.) and Spodnjeposavska (by 2 p.p.). The ratio between the most and least developed region according to GDP per capita grew from 1.8:1 in 1995 to 45 The coefficient of variation is defined as the ratio of the standard deviation to the average, and this calculation is modified to take a region's size into account. IMAD Development Report 2005 51 Preconditions for Implementing the Development Strategy 2.1:1 in 2002. Central Slovenia region achieved 98% of the GDP per capita at purchasing power parity of the EU-15 in 2002 and 107% of the EU-25 average, while the region with the lowest GDP per capita, Pomurska, achieved just 48% of the EU-15 and 52% of the EU-25 average. Central Slovenia typically creates more than a third of total Slovenian gross value added (35% in 2002). One-third of gross value added is also created by the Podravska, Savinjska and Gorenjska regions combined, while the rest is created by the eight other regions. Central Slovenia created almost three-quarters of its gross value added in the services sector, a share which is surpassed only by the share of Obalno-kraška. Koroška and South-eastern Slovenia are anomalies because of their gross value added in industry and mining, and Notranjsko-kraška is an anomaly in terms of construction. The Pomurska region creates an above-average share of its value added in agriculture. Decreases in inter-regional differences in unemployment, measured by the variation coefficient, began after 2002 and gained momentum in 2004. The lowest inter-regional differences were attained in 1999 (with a variation coefficient of 29.8%), which was followed by a period of increase from 2000-2002 (up to 34.8%). The differences have again been decreasing since 2003 and the variation coefficient thus achieved a value of 30.7% in 2004. After several years of unequal drops in the unemployment rates in all regions (during the 1997-2001 period), unemployment rates began to increase somewhat once again after 2001 in certain regions (Koroška, Zasavska, Pomurska and Goriška). The trend stopped in 2004 since the unemployment rate increased only in the Goriška region. This region has had the lowest registered unemployment rate for a number of years, although this figure has been slowly but steadily growing; however, it remains significantly below the Slovenian average (amounting to about 65% of the Slovenian average). In 2004, the highest registered unemployment rate was in Pomurska (exceeding the Slovenian average by almost 60%) and, although the figure was somewhat lower than in the previous year, its decrease has tended to be slower than the fall in the Slovenian average. Apart from Pomurska, the Slovenian average was exceeded in Podravska, Zasavska, Spodnjeposavska, Savinjska and Koroška. The problem of structural unemployment manifests itself differently in each region and presents problems even in regions with below-average levels of registered unemployment. Long-term unemployment continues to drop further across all regions. It is highest in the Spodnjeposavska region and above-average in Southeastern Slovenia, Podravska, Pomurska, Savinjska, Zasavska and Koroška. The underlying causes lie in the low education levels of the unemployed (South-eastern Slovenia and Pomurska) or in the lack of jobs for job-seekers with a tertiary education (Central Slovenia, Goriška, Obalno-kraška, Notranjsko-kraška, and Gorenjska). Unemployed workers above 40 years of age are also difficult to employ; while their share has been decreasing after 2001, they continue to constitute almost half of the unemployed in Gorenjska and Spodnjeposavska regions. The trend of more women joining the ranks of the unemployed has been halted in some regions, albeit in most regions they still comprise more than half the unemployed. IMAD Development Report 2005 52 Preconditions for Implementing the Development Strategy Regional differences in Slovenia can also be measured through other indicators (Pecar, 2003, pp. 6-7) and these reinforce the findings of relatively small differences in the development of the most and least developed regions. Regional differences, measured in terms of GDP per capita at purchasing power standards, are among the lowest of all countries in the newly expanded Union. Studies indicate that regional differences in development - despite considerable investments through cohesion policies for the least developed regions - have been decreasing very slowly in the European Union (A New Partnership for Cohesion, 2004, p. 149). Spatially balanced development.46 The long-term problems and goals in the area of spatially balanced development remain unchanged, although some positive developments have occurred. Regarding the assumed mechanisms and working goals for achieving spatial development according to the SEDS, three have posted no gains, two have yielded mixed (positive and negative) tendencies, while two have witnessed relatively positive changes. The SEDS emphasises a greater role for regional centres and the formation of regions as mechanisms for improvements. The process of forming regions has been slow, in particular due to the lack of suitable mechanisms of local self-management, which also influences goal attainment and the need to increase the role of cities, particularly regional centres of national importance. Two important mechanisms also include improving spatial planning and developing a zoning policy. Spatial planning theoretically plays a developmental role - at least that is the purpose of spatial planning legislation - but in practice it still needs to overcome the developmental hurdles posed by the lagged implementation period and its own inherent imperfections. The land policy is also not currently serving its developmental function. Partial explanations can be found in its official overseer, the Housing Fund of the Republic of Slovenia, which had been burdened with other duties until now; further, records and statistics are lacking and thus preparations for introducing real-estate taxes came to a halt. The spatial cohesion of the country is undoubtedly improving with the further completion of the national highway programme. Slovenia is successfully using the highway programme to utilise the benefits offered by European traffic corridors as traffic accessibility is greatly improving. However, it has not been using these corridors as successfully to accelerate its railway and other public passenger transit. Inclusion in the European regional policy mechanism was successful at least formally following adoption of the Single Programming Document as a joint pact between the EU and Slovenia, which encompasses regional development projects. European funds were still not utilised in the past year as projects that could have been financed through the EU structural funds were mainly financed through domestic sources. In the area of agricultural policy, two programmes relevant to spatial development were underway in 2004: (i) the Rural Development Programme 2004-2006, which 46 We still lack suitable synthesised statistical indicators to assess the results of spatial development and thus we must restrict ourselves to merely qualitative evaluations. IMAD Development Report 2005 53 Preconditions for Implementing the Development Strategy uses mainly spatial measures and transfer payments for regions with limited activities in order to promote the multi-purpose role of agriculture; and (ii) the Single Programming Document 2004-2006, where one of the four key priorities is to restructure agriculture, forestry, and fishing. For 2004, the planned measures from the first document were entirely realised and thus European funds earmarked for them have not yet been utilised. IMAD Development Report 2005 54 Environmental Development 4.. Environmental development THE SEDS' OBJECTIVE: Environmental development, as defined here, refers to the progressively improving utilisation of natural resources for the purposes of achieving greater prosperity. Environmental capital is given economic significance through environmental services: the growth, reproduction, differentiation and other economic services that maintain and preserve the animate and inanimate worlds. Hence, there is an important distinction between protecting and developing the environment since the former is primarily concerned with managing excessive pressure on the environment, while the latter refers to managing environmental capital so as to maximise renewable environmental welfare in the long term. THE REPORT'S FINDINGS: Despite the numerous recent measures adopted in the area of environmental protection and development, the current situation is still unsatisfactory. Slovenia is burdened by energy-intensive industries that are only slowly on the decline, an increasing share of environmentally hazardous industries, and above-average, albeit decreasing, agricultural intensity in terms of fertiliser use compared to the EU. Better results than in the EU have been achieved in the areas of the environmental impact oftraffic, organicfarming and the use ofrenewable energy sources. ANALYSIS: To examine realisation of the SEDS' goals we should look not at the state of the environment but at the relationship between economic and environmental development. Thus, evaluating the extent of greenhouse gas emissions and environmental damage requires the examining of underlying economic structures: trends in the share of dirty industries in the composition of manufacturing, the share of energy-intensive industries and road traffic, renewable energy sources and tree felling. Agricultural intensity is an indicator of the environmental burden of chemicals, environmental protection and food safety. The share of dirty industry - industry with the highest share of environmentally destructive emissions per unit of output - in total value added in the manufacturing sector has been increasing since 1999, and the rise was particularly pronounced in 2003 as a result of growing value added in the production of chemicals. Output in these industries has been growing faster than output in all other manufacturing sectors combined, especially in recent years. Industries that place the biggest burden on the environment and are most energy-intensive created almost one-quarter of total value added in manufacturing in 2003, generating a developmental conflict between the goals of economic growth and development on one hand and environmental development on the other. A particularly alarming fact is that in 2002 current and capital expenditures for environmental protection dropped significantly, mainly in the chemicals industry. The existing Slovenian economic structure, in which manufacturing comprises 27% of total value added (the highest proportion in the EU-25), and among which more than a third are energy-intensive industries like the metal, paper and chemical industry (creating 9.7% of total value added, the highest in the EU-25), is one of the reasons for the Slovenian economy's high energy intensity. While falling considerably IMAD Development Report 2005 55 Environmental Development during the 1995-1999 period (on average by 2.3%), energy intensity has been decreasing only slowly more recently (even rising somewhat in 2001, and dropping by 1.8% in 2003). The National Energy Programme adopted last year sets improved energy efficiency as one its strategic long-term goals (it targets a 2.5% lower annual growth rate of end-energy needs relative to GDP growth). The main measures for improved energy-use efficiency include: introducing an energy tax, a tax on carbon dioxide emissions, financial incentives for eco-friendly manufacturing,47 spreading awareness among energy users, energy advisory network, promoting the use of energy services (contract-based energy saving or energy supply, i.e. demand-side management), and support for research, development and demonstrative projects. The road transport of goods is significantly overtaking railway transport in both Slovenia and the rest of the world since it is the more competitive alternative due to its flexibility and non-included external environmental costs. Its share in Slovenia in total goods transport is somewhat lower than the EU average: it has remained constant over the past three years (at 65.8%) but our estimates indicate that it increased slightly last year and moved towards the EU average. The structure of goods transport is also a function of the geographical characteristics of a particular country and its traffic policies. The railway services market was liberalised with Slovenia's entry to the EU and the sole provider has been restructured. Future increases in railway traffic will also be influenced by the further development of related infrastructure (which includes both the railway network and the Koper harbour). The increased use of renewable energy sources is consistent with the concept of sustainable development and significantly contributes to attaining the Kyoto Protocol's goals, albeit it is also subject to natural factors. The share of this energy in total energy use in Slovenia is - largely due to the high share of hydroelectric energy - almost twice as high (10.8% in 2003) as the EU average. Recent droughts have decreased this share, with slight increases in biomass usage. The drop in hydroelectric power in the EU has been counterbalanced by increased biomass and wind energy. According to natural endowments, Slovenia still has considerable potential for increasing the usage of the so-called classical sources of renewable energy (biomass, hydroelectricity) as well as non-classical sources (wind, solar). The biomass is related to the management of forests, which are one of Slovenia's few natural resources, and Slovenia appears to be managing this task poorly. Despite the increase in 2003 the intensity of tree felling appears too low, particularly due to tending (thinning for the purposes of natural or artificial regeneration). Compared to the EU, Slovenia is lagging behind in the production of forest assortments. A long-term development policy aimed at boosting ecological stability and economic valuation of forests would improve the situation. Slovenia's agricultural intensity has been falling in recent years, a favourable development from an environmental protection and food safety viewpoint. In 2003, decreases were posted in the use of both macrofeed in mineral fertilisers per unit of fertilised land, as well as total sales of pesticides (after the increase in 2002), and organic and integrated farmland areas expanded. The use of mineral fertilisers in Slovenia is above the EU average, as is the share of organic farmland. We expect 47 Subsidies, low-interest loans, tax exemptions or tax deductions. IMAD Development Report 2005 56 Environmental Development that the adoption of European agricultural policies tying financial incentives to higher environmental standards will continue to reduce mineral fertiliser and pesticide use and expand the scale of organic and integrated farming. A new Environmental Protection Act was adopted last year, regulating the protection of human existence with the inseparably linked natural environment and general conditions of the use of natural resources. The most important innovations of the new act are the introduction of strategic environmental assessment, the environmental protection licence for the operation of certain installations, the strengthening of public participation and rights of access to environmental information, and the systematic improvement of the economic instruments of environmental protection with the aim of putting into practice the 'polluter pays principle'. A resolution on the National Environmental Action Programme has also been proposed (for the period to 2008) with the aim of generally improving the state of the environment, the quality of life, and the protection of natural resources. Based on the National Allocation Plan for the 2005-2007 period, greenhouse gas emissions rights were granted free of charge to the operators of certain equipment48 that produce such emissions. This is one of the instruments49 whose aim is to reduce greenhouse gas emissions and attaining an 8% decrease in these emissions by the 2008-2012 period relative to the 1986 base year, a responsibility which arises from Slovenia's ratification of the Kyoto Protocol. From a natural habitat and heritage conservation perspective, Slovenia protected more than one-third of its territory with Nature 2000 and thus restricted both intrusions and other uses of this space for the purposes of developing certain economic activities. Nature conservation can simultaneously provide both a developmental advantage and a developmental hurdle, and thus the conservation functions will have to be reconciled with the developmental purposes in order to ensure an appropriate level of economic and social development for the residents of protected areas. 48 This refers to the operators of devices who are obliged to obtain permission for the emission of greenhouse gases in order to operate theses devices, pursuant to the new Environmental Protection Act. 49 Currently several measures in the area of emissions reductions are in use such as taxes for carbon dioxide emissions, promoting the efficient use of energy among consumers, promoting an increase in renewable energy source use, energy labelling of house appliances, thermal insulation characteristics of building materials, waste management, power and natural gas trading, spreading awareness among consumers regarding the carbon dioxide emissions of motor vehicles, promoting the use of biofuels, introducing excise duties for fossil fuels and electricity. IMAD Development Report 2005 57 Environmental Development 5. Social development THE SEDS' OBJECTIVES: The SEDS sets down three basic conditions in social development which, if met, would lead to an increase in welfare and facilitate human development: a long and healthy life; education and access to information; and access to the resources neededfor a decent standard of living. The SEDS also highlights the problem of increasing income differentials among different social groups, generations and regions, as well as the growing share of unemployed women. It sets sound social security and social cohesion as the goals of social development policy. THE REPORT'S FINDINGS: Social development is bringing positive results: while life expectancy is increasing the risk of poverty rate before and after social transfers and income inequalities are falling. Although still below the European Union average, the funds allocated by the government for welfare through the systems of mandatory social, health, pension and disability insurance and other systems ofpublic funding are gradually rising. However, some indicators (for instance the difference between the risk of poverty rate before and after social transfers) show that the transfers are not yet efficient enough. Moreover, the effects of pension reform can be seen in the rising average retirement age and the falling ratio ofpensions to wages. ANALYSIS: The human development index (HDI)50 shows the level of social development and general welfare. The 2002 index reveals a dual rise: a rise in the value of the index and a rise in Slovenia's ranking among 177 countries (Slovenia was ranked 27th). Promising social development is also revealed by several other indicators. Life expectancy, which is an indicator of health and general welfare, increased in 2003. Men and women born in 2003 can therefore expect to live 73.2 and 80.7 years, respectively. While the gaps are narrowing, Slovenia still lags behind the EU-25 average. In 20 0251 its life expectancy gap with the EU-25 was 2.5 years for men and 1.2 years for women. The longest life expectancy was recorded in Spain for women (83.7 years) and in Sweden for men (77.9 years). With 4.0 babies dying per 1000 live born babies in 2003, infant mortality increased slightly over 2002, when it reached a record low of 3.8. Nevertheless, it remained below both the EU-25 and EU-15 averages, the latter being 4.3. Meanwhile, Sweden has the lowest and Latvia the highest infant mortality (2.8 and 9.4). Another key indicator of social development is the volume of public funds (calculated by way of ESSPROS) which is earmarked for welfare and social protection through systems of mandatory social, health, pension and disability insurance, as well as through other systems of public funding. Besides raising the quality of life of children and families, the government also uses these funds to secure social protection for the elderly, sick, disabled, unemployed and poor as well as for war veterans and the victims of war. Slovenia allocated 25.4% of its gross domestic product52 for social protection in 2002. On average, the EU-15 earmarks 50 HDI results are presented under 1.1. Balanced economic, social and environmental development. 51 The latest data available for the EU-25 are from 2002. 52 The figure for 2002 is somehow lower than that published in the 2004 Development Report because the estimate of Slovenia's gross national product was revised in the meantime. IMAD 58 Development Report 2005 Social Development 1.9 p.p. more than Slovenia yet there are considerable differences among EU members. As for the share of social protection funds in the GDP, Slovenia was placed after Finland (25.8%) in 2001 (the latest available data for the EU), but ahead of Portugal (23.9%), Luxembourg (21.2%), Spain (20.1%) and Ireland (14.6%). Slovenia was also placed ahead of all three new EU member states for which the figure is available for 2001, namely Hungary (19.9%), Slovakia (19.1%) and Malta (18.3%). Comparing the structure of social protection funds with the EU-15, Slovenia earmarked more for sickness and health care, for children and families as well as for disabilities in 2001. Less money went for unemployment and survivors, while the share allocated for other forms of social exclusion was practically the same as in the EU-15. However, both Slovenia and the EU-15 assign the greatest amount of social protection funds for old age (2002: 44.7%), and sickness and health care (2002: 31.3%). The two categories take up as much as over three-quarters of all funds. The risk of poverty rate keeps falling in Slovenia, reaching 11.953 in 2002, which is 2.1 p.p. below the EU-15 and 4.654 p.p. lower than in the EU-25. Moreover, the inequality of income distribution has been dropping since 1997 in Slovenia, and so has the depth of poverty55 since 1999. The comparison of the Gini coefficient (22.0) and income quintile share ratio (3.1) shows that in Slovenia inequality is substantially below that of the EU-25, whose Gini coefficient was 28.0 in 2001 and the income quintile share ratio was 4.4. In the absence of a system of social transfers, the risk of poverty would increase by 7.3 p.p. in Slovenia and 9 p.p. in the EU-15. This comparison reveals that Slovenia's social policy is slightly less effective than that of the EU-15, meaning that even better results could be achieved with the funds currently available for this purpose. Apart from low education, unemployment56 is the prime contributor to poverty risk and consequently a social exclusion factor. This is the reason why the risk of poverty and social exclusion is measured indirectly with the share of the population living in jobless households. 8.1% of people aged from 18 to 64 lived in jobless households in Slovenia in 2002. As a result, the same share lived in a non-stimulating environment, simultaneously losing touch with the labour market which makes the risk of long-term inactiveness increasingly more likely, particularly for the elderly. (In Slovenia 23.5% of people aged 55 to 64 were employed in 2003 as compared to 40.2% in the EU-25). Nevertheless, the share of the Slovenian population living in jobless households in the 1996-2002 period was 2.2 p.p. below that of the EU-15, and was decreasing faster than in the EU-15. Further, Slovenia's share in 2002 was 4 p.p. below the average of EU-25 which, however, witnesses great differences among individual member states. With 5.4%, Portugal had the lowest share of jobless households, Spain's rate matched Slovenia's at 8.1%, followed by Luxembourg (8.9%). Belgium (16.3%) and Hungary (15.6%), on the other hand, posted the biggest shares of jobless households. 53 The calculation includes only monetary sources. 54 The figures include not only financial resources but also income in kind. 55 The share of people who are far away from the poverty threshold. 56 The risk of poverty is much higher among the unemployed than the employed, reaching 39.3% in the first group and 3.7% in the second in 2002. IMAD Development Report 2005 59 Environmental Development Although not very high in Slovenia, long-term unemployment makes job seekers more passive which further narrows their chances to re-enter the labour market. While long-term unemployment57 stood at 3.4% in 2003 in Slovenia (3.3% among men and 3.6% among women), more than half of all unemployed were long-term unemployed people (54.7%). Slovenia had a rate of very long-term unemployment58 of 2%, which is almost the same as in the EU-15 (1.9%) and well below the 4% average of the new EU member states. Enhancing one's prospects to find a job considerably, education and training seem to be a good preventive measure against poverty and social exclusion. According to econometric calculations, the likelihood that a person gets a job increases by 0.4 p.p. if they increase their time for education and training by 10%. Moreover, the likelihood of remaining jobless decreases by 0.2 p.p. (OECD, 2004, p. 185). The structural indicator of early school leavers, which indirectly increases the risk of poverty due to more limited access to the job market, is better in Slovenia (2001: 7.5%) than in the EU-15 (18.9%) or the EU-25 (17.3%). Welfare, however, cannot be measured merely by one's material resources as represented by the volume of funds the government allocates for social protection. What also matters is people's perceptions and impressions, which are reflected in a subjective evaluation of the satisfaction with the quality of life and the perception of social exclusion. People have their own way of understanding welfare and their ability to cope with life situations, which shapes their own view of life59. Compared to the EU-2560, the inhabitants of Slovenia have expressed the lowest level of the subjective perception of social exclusion61. As many as 81% of respondents are generally satisfied with their lives. They are most satisfied with their home and family life (94%), and named employment as the most important welfare factor. Three years after it began to be implemented, pension reform has already yielded its first results. The average retirement age is rising, reaching 59 years and 11 months for men and 55 years and 8 months for women in 2003. The ratio of the average old-age pension to the average wage fell to 71.1% in 2003 (2000: 75.3%). Its results can moreover be seen in public finance: the share of pension expenditure in gross domestic product fell to 11.4% in 2002. The reform also envisages the 57 The share of people who are jobless for at least a year in the entire active population. 58 The share of people who are jobless for more than two years in the entire active population. 59 A study on the quality of life carried out in the EU-25 plus three candidate countries in 2004 by the European Foundation for Improvement of Living and Working Conditions and the European Commission is based on a multidimensional concept of the quality of life: six core areas were selected for the survey: (1) relations with family and friends; (2) emotional welfare; (3) health; (4) work and production activities; (5) attachment to the community; and (6) personal security. 60 Ibidem. 61 Measured by the social exclusion index, the index consists of reactions to four statements with which the survey monitors: (1) the feeling of influence in society (my contribution is not recognised by society); (2) the feeling of community inclusion/exclusion (I feel excluded from society); and (3) the feeling of anomie (I believe I have no chance of being a useful member of the community; some look down on me due to my job or income). In Slovenia, 81% of respondents disagree with all statements, 6% agree with two or more. IMAD 60 Development Report 2005 Social Development possibility of capital-funded supplementary pension insurance financed by premiums paid by workers or employers, or part of the premium by each. Insurance can be collective or individual. Pension funds are being set up in Slovenia that offer voluntary supplementary pension insurance. This service was previously only offered by insurance companies. The number of people insured in pension funds and the amount of premiums that the funds collect is rising62. This trend is expected to continue as a result of the collective pension insurance scheme for civil servants. 62 At end-2004, nearly 400,000 people were estimated to take part in supplementary pension insurance, which is almost half of all active persons insured under mandatory pension insurance (around 80,000 at end-2001). The bulk of the rise results from a collective supplementary insurance scheme for public servants in which some 160,000 people are taking part. Premiums totalled SIT 6.4 bn in 2001, SIT 23.8 bn in 2002, and are expected to reach SIT 58 bn in 2004 for the entire period of insurance, of which SIT 16 bn comes from public servants IMAD Development Report 2005 61 Meeting the Lisbon Strategy Objectives 6.. Meeting the Lisbon Strategy objectives The profile of Slovenia's development broken down by structural indicators. The European Commission has short-listed fourteen general structural indicators63 to assess implementation of the Lisbon Strategy (Table 4). Compared to the EU-25 average, Slovenia is better positioned according to several structural indicators: youth education attainment level; share of business investment in gross domestic product; volume of freight transport relative to gross domestic product; and social cohesion indicators (poverty-risk rate after social transfers and the long-term unemployment rate). Moreover, from the aspect of these structural indicators Slovenia is also better positioned than the other new EU member states. Table 4: Slovenia's Profile in Terms of Structural Indicators LISBON PROCESS STRUCTURAL INDICATORS (14) -SLOVENIA'S PROFILE AND CHANGES COMPARED TO THE YEAR BEFORE Slovenia places better than or around the EU-25 average Slovenia lags behind the EU-25 average Improvement (from the year before) ❖ Youth education attainment level1, 2003 (SLO: 90.7%, EU-25: 76.7%, EU-15: 73.8%) ❖ Poverty risk rate after social transfers, 2001 (SLO: 11.9% 2, EU-25: 15%, EU-15: 15%) ❖ Long-term unemployment rate, 2003 (SLO: 3.4%, EU-25: 4%, EU-15: 3.3%) ❖ ? Business investment3, 2003 (SLO: 21.1% BDP, EU-25: 16.8% BDP, EU-15: 16.7%) ❖ GDP p.c. in PPS, 2003 (EU-25=100) (SLO: 76.8, EU-15: 109.2) ❖ Labour productivity in PPS, 2004 (EU-25=100) (SLO: 75.6, EU-15: 106.4) ❖ Comparative price levels, 2002 (EU-25=100) (SLO: 75.5, EU-15: 103.8) Deterioration (from the year before) ❖ Volume of freight transport relative to GDP, 2002 (1995=100) (SLO: 93.3, EU-25: 99.7, EU-15: 100.6) ❖ R&D expenditure relative to GDP, 2002 (SLO: 1.53% BDP, EU-25: 1.93% BDP, EU-15: 1.99% BDP) ❖ Employment rate, 2003 (SLO: 62.6%, EU-25: 62.9%, EU-15: 64.4%) ❖ Employment rate of older workers, 2003 (SLO: 23.5%, EU-25: 40.2%, EU-15: 41.7%) ❖ Greenhouse gas emissions, 2002 (1990=100) (SLO: 98.7, EU-25: 91, EU-15: 97.1) ❖ Energy intensity of the economy, 2002 (SLO: 342.8 kgoe/1,000 EUR; EU-25: 209.3 kgoe/1,000 EUR, EU-15: 191.1 kgoe/1,000 EUR) Source of data: Eurostat, New Cronos database. Notes: 'The share of people aged 20 to 24 who have at least finished secondary school. 2Income in kind is not used in calculation of the rate. If income in kind is taken into account, then the rate is 10.6%. 3The share of GDP allocated for investment by the private sector. Note: data for the indicator of the dispersion of regional employment rates are not available for Slovenia. Slovenia lags behind the EU-25 average in more than half the indicators yet it is placed better than most new EU member states in most indicators. The country lags behind in general economic indicators (gross domestic product per capita in PPS, labour productivity in PPS), in innovation and research indicators (volume of R&D expenditure relative to the gross domestic product), labour market indicators (the employment rate of older workers in Slovenia is one of the lowest in the EU) and environmental protection indicators (reduction of greenhouse gas emissions and energy intensity of the economy). 63 Indicators are regularly published by the European Commission on the website of the Eurostat, and are analysed by it in the Spring Report to the European Council. Eurostat publishes not only the short listed indicators but also the complete database of structural indicators. IMAD Development Report 2005 62 Meeting the Lisbon Strategy Objectives Measured against the values of indicators in the previous year, Slovenia managed to reduce its gap in several indicators where it was placed below the average of the EU-25. Gaps were reduced in labour productivity, gross domestic product per capita in purchasing power and in comparative price levels. On the other hand, the indicators of employment (employment rate64, employment rate of older workers), research and development expenditure and both environmental indicators show lower values than in the previous year. When analysing the entire set of indicators one can establish that in some indicators of the knowledge-based society Slovenia comes in above the EU-15 average, for instance in life-long learning and the level of households with Internet access. Social cohesion, most notably inequality of income distribution, the poverty-risk rate before and after social transfers and the difference in gross pay by gender, is another indicator where Slovenia beats the EU-15 average. On the other hand, some development indicators, such as patent registration and IT expenditure, are a cause for concern. Implementation of the Lisbon Strategy in Slovenia. The initiatives adopted in Lisbon and then upgraded at later sessions of the European Council set goals and measures in a number of areas. The goals are defined in terms of quantity and quality65. Moreover, many are "pan-European" which means their progress is hard or even impossible to monitor at the national level. The implementation of the Lisbon Strategy goals differs among EU member states.66 Like with the structural indicators, Slovenia is doing better than the rest of the new EU member states but lags considerably behind the most successful EU members. However, the levels of attainment of individual goals differ in both Slovenia and the other EU member states (Table 5). In employment, Slovenia achieved the employment rate goal for women set for 2005 as early as 2000. The rate further improved in the period from 2000 to 2004, meaning that the goal for 2010 has also already been reached. The employment rate increased in 2004 over 2003 by a great deal, yet the Lisbon goal for 2005 will only be achieved if the 2004 employment trend continues in 2005. On the other hand, Slovenia is far from achieving the two other goals. The employment rate of older workers and the average retirement age are rising, yet too slowly to reach the set goals by 2010. As for the knowledge-based society goals, Slovenia achieved the goal of integrating adults in lifelong education as early as 2003, yet methodological differences put the value of data and consequently the achievement of the goal in question67. In all other indicators Slovenia is lagging far behind. Results are improving for expenditure on research and 64 Data for 2004 show considerably better results. With a 65.6% employment rate in 2004, Slovenia outperformed the average of the EU-25 and the EU-15 for 2003. 65 Progress is hard to measure in goals which, for instance, define business incentives. Another problem is the nonadoption of a uniform methodology for a regulatory framework or administrative obstacles (for instance, Belgium, Denmark and the Netherlands have decided to cut administrative obstacles for companies by 2010 by 25%). 66 In the year of adopting the Lisbon Strategy, the EU-15 posted a relatively high economic growth rate of 3.6%, which however dropped to 1.2% in the period from 2001 to 2003, well below the set goal of 3%. EU member states had different growth rates and also differed in the implementation of other partial goals. The closest to achieving the goals were Denmark, Luxembourg, the Netherlands, Austria, Sweden and Great Britain. 67 Methodological differences are explained under 3.1. Transition to a knowledge-based society. IMAD Development Report 2005 63 Meeting the Lisbon Strategy Objectives Table 5: Implementation of the Lisbon Strategy goals Selected Lisbon Strategy goals Quantification of goals Slovenia's achievements EMPLOYMENT - Total employment rate 67% until 2005, 70% by 2010 2000: 62.8%; 2004: 65.6% - Employment rate for women 57% until 2005, 60% by 2010 2000: 58.4%; 2004: 61.3% - Employment rate of older workers (55-64 years) 50% by 2010 2000: 22.7%; 2003: 23.5% - Prolongation of average retirement age by 5 years by 2010 2000: 57.2 years; 2003: 57.8 years KNOWLEDGE-BASED SOCIETY - R&D expenditure relative to GDP 3% of GDP by 2010, of which two-thirds from the business sector 2000: 1.44%; 2003: 1.53% - Internet access at schools 100% - Inclusion of adults in lifelong education 12.5% of all adults 2001: 7.6%, 2004: 17.9% - Early school leavers To halve the number of dropouts by 2010. 2001: 7.4%; 2004: 4.2% INTERNAL MARKET - Transposition of internal market directives to national legislation 98.5% transposition by 2010 2004: 96.8% - Timely transposition of directives on the basis of the Lisbon Strategy to national legislation In two years at the latest.1 2004: backlog of 20 directives - State aid Drop to 1% of GDP. 2000: 2.07% GDP; 2003: 1.52% GDP ENVIRONMENT, SUSTAINABLE DEVELOPMENT - Production of electricity from renewable sources 22% of total consumption by 2010. 2000: 31.4%; 2002: 25.9% Source of goals: Conclusions of the European Councils In Lisbon, Barcelona, Stockholm and Gothenburg, various documents of the European Commission. Sources: Eurostat, New Cronos database and SORS. Note: 'The »zero tolerance rule« does not applyto the new EU members states yet. development relative to GDP, yet too slowly to achieve the goal by 2010 if the trend continues at the current pace. With the number of early school leavers falling a great deal in the 2000 to 2003 period this goal has almost been reached, yet the value of the data is questionable due to methodological differences.68 The goal of Internet access at schools has nearly been achieved, but the country lags behind in the number of computers at schools. Moreover, the level of use of information and communication technologies in the education process69 and the level of specialised didactic skills in the education of workers are too low. In the area of the internal market, Slovenia has adjusted its legislation on the free movement of goods and services, including competition protection, in line with the acquis. Together with Lithuania, it has the lowest, namely 5.7%, deficit70 among all the new EU member states in the transposition of internal market directives71. Until the beginning of January 2005, 56 of a total of 73 directives72 adopted on the basis 68 The problem of early school leavers is described in detail under 3.1. Transition to a knowledge-based society. 69 The differences in the intensity of use of ICT in the education process are much bigger. Teachers and pupils in the EU use personal computers twice as much as in Slovenia (the example of primary schools - Slovenia: 1.1 hours a week, EU-15: 3.6 hours). 70 Second Implementation Report of the Internal Market Strategy 2003-2006, 27 January 2005. 71 Slovenia had failed to transpose 36 of a total of 1,579 directives by December 2004, which represents a 3.2% transposition deficit. 72 The directives aim at a greater degree of harmonisation and a common legislative framework in order to strengthen the internal market, upgrade competitive ability and increase the potential for economic growth. IMAD Development Report 2005 64 Meeting the Lisbon Strategy Objectives of the Lisbon Strategy were planned to be transposed to the national legislation. Slovenia had fully transposed 44, while 8 were transposed only partly. As a result, it has a 78% Lisbon directives transposition rate, which places Slovenia among the best performing countries (the average rate is only 58.3%). Slovenia is also rapidly reducing the amount of state aid, whereby it is moving closer to the goal. In environmental protection, Slovenia had a larger share of renewable energy in the consumption of primary energy than set in the relevant Lisbon Strategy goal. As part of new economic and employment cycles, the European Commission suggests73 a comprehensive approach to streamlining the existing broad guidelines for economic policy and employment. Therefore, like the other EU member states Slovenia has to carry out a nation-wide debate on the basis of which it should pass a national action plan for economic growth and jobs with commitments and goals. This means that the goals of the Lisbon Strategy will no longer be the same for all EU member states but will differ according to the level of economic development and development orientation of each member state. 73 A communiqué to the spring session of the European Council, 2005, pp. 10-11. 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Research institute of Organic Agriculture FiBL (2004). Organic Farming in Europe - Statistics per 31.12.2003. Obtained on 24.11.2004 at http://www.organic-europe.net/europe_eu/ statistics.asp 38. Revue Regionale (2004). Value added: the distribution of labour and capital. Revue Elargissement, 70 (8 November), 2. 39. RIS, 2004. Obtained on 2.12.2004 at http://www.ris.org/main/novice/ readnews.php?m2w=&sid=121. 40. Rojec, M., Sušteršič, J., Vasle, B., Bednaš, M. and Jurančič, S. (2004). The Rise and Decline of Gradualism in Slovenia. Post-Communist Economies, 16(4), pp. 459-482. 41. Russell, H. and Whelan, C.(2004): Quality of life in Europe: Low income and deprivation in an Enlarged Europe. Dublin: European foundation for improvement of living and working conditions. Available at: www.eurofound.eu.int 42. Second Implementation Report of the Internal Market Strategy 2003-2006. (2005). Brussels: European Commission. 43. Sixth Survey on State Aid in Slovenia (for 2001, 2002, 2003). (2004). Ljubljana: Ministry of Finance. IMAD Development Report 2005 67 Bibliography and Sources 44. Stanovnik, P. and Rojec, M., co-ordinators (2004). Strokovne podlage za izdelavo Programa Vlade RS za spodbujanje neposrednih tujih investicij. Ljubljana: Institute for Economic Research. 45. State Aid Scoreboard, autumn 2004 update (2004a). Brussels: European Commission. 46. State Aid Scoreboard, spring 2004, update (2004). Brussels: European Commission. 47. Structural Indicators. (2004) Obtained on 13.12.2004 at http://europa.eu.int/comm/eurostat/ newcronos/reference/display.do?screen=welcomeref&open=/science/infosoc/policy/ polind_a&language=en&product=EU_MAIN_TREE&root=EU_MAIN_TREE&scrollto=507 48. TIMSS (2003). Gradivo za novinarsko konferenco. Ljubljana: Ministry of Education and Sport, 2004. Available at: http://www.mszs.si/slo/aktualno/novica.asp?ID=4854 49. UNCTAD (2004). 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Ljubljana: Zavod za gozdove, February 2004. 56. Zgaga, P. (2004): Analiza gibanj v strukturi študentov in diplomantov terciarnega izobražavanja (1981-2004). Obtained on 24.12.2004 at http://www.gov.si/umar/projekti/srs/eksp-raz/ PZgaga.pdf. Sources: 1. European Environment Agency. Fertiliser consumption. Raw data and trend. Obtained on 26. 11. 2004 at http://dataservice.eea.eu.int/dataservice/viewdata/viewpvt.asp?id=184 2. Eurostat (2004). Agriculture in the European Union - Statistical and economic information 2003. Obtained on 15. 11. 2004 at http://europa.eu.int/comm/agriculture/agrista/2003/table_en/ 2012.pdf 3. Eurostat (2004a). Eurostat yearbook 2004 - The statistical guide to Europe. Data 1992-2002. Obtained on 15. 11. 2004 at http://epp.eurostat.cec.eu.int/portal/ page?_pageid=1073.1135281.1073_1135295&_dad=portal&_schema=PORTAL&p_product_code=KS-CD-04-001 4. Eurostat (NewCronos); European Commission: Towards a European Research Area - Science, Technology and Innovation - Key Figures 2003-2004. 5. Evidenca prometa fitofarmacevtskih sredstev na debelo za leto 2003 (v kg aktivnih snovi). (unpublished). Ljubljana: Ministry of Agriculture, Forestry and Food, Phytosanitary Administration. Obtained on 26. 11. 2004. 6. First Release No. 149/22.09.2004. Ljubljana: SORS. 7. First Release, National accounts, No. 128/31.08.2004. Ljubljana: SORS. 8. First Release, Social cohesion indicators adopted at the Laeken Council, 1997-2002; No.135, September 2004. Ljubljana: SORS. 9. Gross domestic product, 1995-2003. Ljubljana: Statistical Office of the Republic of Slovenia, 2004. IMAD Development Report 2005 68 Bibliography and Sources 10. OECD (2004). Economic Outlook, December, No. 76. Paris: OECD. 11. Rapid Reports No. 317. (2004). Usage of ICT in households and by individuals. Ljubljana: Statistical Office of the RS, 2004. 12. 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Hanzek, M. (ed.). Ljubljana: UNDP, Institute of Macroeconomic Analysis and Development. 6. Pecar, J. (2003). Izbrani socio-ekonomski kazalnikipo regijah. Working Papers, No. 5. Ljubljana: Institute of Macroeconomic Analysis and Development. 7. Povsnar J. (2004). Energy. Ljubljana: Institute of Macroeconomic Analysis and Development, Slovenian Economic Mirror No. 10. 8. Report on Structural Reforms. (2004). Ljubljana: Institute of Macroeconomic Analysis and Development. 9. Spring Report 2004. (2004).). Analysis, Research and Development. Ljubljana: Institute of Macroeconomic Analysis and Development. 10. Stare, M., Kmet-Zupancic, R. and Bucar, M. (2004), Slovenia - On the Way to the Information Society. Ljubljana: Institute of Macroeconomic Analysis and Development. Analytical Appendix IMAD Development Report 2005 70 Analytical Appendix - Indicators List of Indicators Syntesised development indicators: • Gross domestic product per capita in purchasing power standards_ 72 • Human development index _ 74 • National competitiveness according to the WEF _ 76 • Cross-regional variation in gross domestic product_ 78 • Cross-regional variation in unemployment rates _ 80 Indicators of economic development: Macroeconomic stability • Real growth of gross domestic product_ 86 • Emloyment rate _ 88 • Unemployment rate_ 90 • Inflation _ 92 • General government sector balance _ 94 • General government debt_ 96 • Balance of payments _ 98 • Gross external debt _ 100 • Country risk_ 102 Knowledge-based society • Total public expenditure on education __106 • Average number of schooling years of people in employment __108 • Share of the population with a completed secondary or higher education __110 • Internet use__112 • Gross domestic expenditure on research & development__114 • Number of researchers per thousand of the labour force__116 • Innovation active enterprises & the number of patent applications per million residents filed at the European Patent Office__118 Competitiveness of the economy • Labour productivity__122 • Unit labour costs __124 • Market share__126 • Composition of merchandise exports according to factor intensity_ 128 IMAD Development Report 2005 71 Analytical Appendix - Indicators • Share of gross fixed capital formation in GDP_ 130 • Foreign direct investment _ 132 • Total assets of banks _ 134 • Insurance premiums_ 136 • Market capitalisation_ 138 Developmental role of the state • General government expenditure __142 • State aid __144 • Court backlogs__146 Indicators of environmental development: • Share of "dirty industries" in manufacturing __150 • Energy intensity__152 • Renewable energy sources__154 • Share of road transport in freight transport__156 • Agricultural intensity__158 • Tree-felling intensity__160 Indicators of social development: • Long-term unemployment rate _ 164 • Life expectancy and infant mortality _ 166 • Population in jobless households _ 168 • Poverty risk _ 170 IMAD Development Report 2005 72 Analytical Appendix - Indicators Gross domestic product per capita In purchasing power standards In December 2004, Eurostat released new data on gross domestic product per capita expressed in terms of purchasing power standards (GDP in PPS) for 32 countries for the 1995-2003period. The figures for 2002 are final, while those for 2003 are provisional. According to the latest data, the member states of the European Union ranged from 40% and 215% of the EU-25 average in terms of GDP per capita in PPS. After the accession of the generally less developed ten new countries, the average GDP per capita in PPS in the EU-25 fell in 2003 and reached 92% of the EU-15 average (90% in 1995). Due to the so-called statistical effect, this also produced a commensurate rise in Slovenia's level of development in 2003, estimated at 71% of the EU-15 average and 77% of the EU-25 average. GDP per capita in PPS of the ten new member states achieved 53% of the EU-25 average in 2003, according to provisional figures. In the group of candidate countries, Bulgaria and Romania reached 30% of the EU-25 average in 2003, and Turkey achieved 28%, which almost equalled their levels achieved in 1995. Eurostat also estimated Croatia's level of development, which totalled PPS 9,700 in 2003 (46% of the EU-25 average). Having reached 77% of the EU-25 average in 2003 Slovenia overtook Portugal, while amongst the new member states only Cyprus is ahead of Slovenia in terms of GDP in PPS. Luxembourg reached the highest level of development in 2003 in terms of GDP per capita in PPS in 2003 which totalled more than twice the EU-25 average (215%). Ireland was one-third above the average, while Denmark, Austria, the Netherlands and the United Kingdom surpassed the average by about 20%. Sweden and Finland were 15% above the average, while France, Germany and Italy recorded figures around 10% above the average. Lithuania was the least developed country in 2003, achieving 41% of the EU average. Among the new members 2003, only Cyprus was more developed than Slovenia in 2003 (83% of the average). Among the old EU-15 members, Slovenia scored PPS 16,400 and outperformed Portugal (PPS 15,900), while it lagged behind Greece which had been ranked lower than Slovenia in 1999-2001. The GDP per capita in PPS indicator is mainly usedfor cross-country comparisons within one year1, while year-on-year comparisons between its values require some caution in interpretation due to the methodology applied, notably when minor changes in subsequent years are involved. Year-on-year comparisons of the indicator's value are hence more reasonable when comparing longer periods. The average GDP per capita in purchasing power standards in the EU-25 totalled PPS 15,200 in 1995 and PPS 21,400 in 2003. The rankings of EU countries by GDP per capita in PPS indices achieved within a longer period are relatively stable. Only Luxembourg and Ireland climbed significantly in their rankings from 1995 to 2003. Luxembourg improved its position relative to the EU by 36 p.p. (from 179% of the average in 1995 to 215% of the average in 2003), while Ireland moved up 34 p.p. (from 99% to 133% of the average). Germany, France, Italy and the United Kingdom remained 10%-20% above the EU average throughout the observed period. Nevertheless, significant differences exist between these countries. The United Kingdom reveals a rising trend in its relative level of development, while Germany and Italy have recorded a downward tendency. France maintained its level 13%-15% above the average throughout the period and exceeded this average by a further 11% in 2003. In the 1995-2003 period, Germany and Italy, in addition to Austria, were among those countries whose position in relative terms worsened most markedly compared to the EU average (Germany's by 9 p.p., Italy's by 8 p.p. and Austria's by 7 p.p.). Since 1995, when Slovenia achieved 68% of the EU average, it has improved its position relative to the European average by 9 percentage points. Among the new member states Slovenia was ranked second, except in 1999 and 2000 when Malta did better, while the gap between Slovenia and Cyprus (the most developed country in the group) has narrowed. It totalled 6 p.p. in 2003 (18 p.p. in 1995). In the group of new member states compared with the EU, only the Czech Republic and Cyprus recorded a lower level of development in 2003 than in 1995 (down 1 and 3 p.p., respectively), while all other countries improved their levels of development. In the 1995-2000 period, Estonia was the only country to outpace Slovenia while since 2001 Latvia, Lithuania and Hungary have also progressed at a faster pace, which indicates a relative slowdown in Slovenia's economic growth. 1 Eurostat notes that caution should be exercised when ranking countries according to GDP in PPS since purchasing power standards used as conversion rates and a means of calculating GDP in terms of purchasing power are statistical constructs based on certain conceptual assumptions, methodological definitions and implementing procedures. A 5% error should therefore be taken into account when calculating purchasing power standards. Relatively small differences in GDP in PPS between countries may hence be the result of methodological factors rather than actual differences between countries (source: Purchasing Power Parities 1999 Benchmarking Results, OECD, 2002). IMAD Development Report 2005 73 Analytical Appendix - Indicators Table: Gross domestic product per capita in purchasing power standards for the new EU member states, 1995-2003; volume indices, EU 25 = 100 1995 1996 1997 1998 1999 2000 2001 2002 2003P EU 25 100 100 100 100 100 100 100 100 100 Cyprus 86 85 84 84 85 86 89 83 83 Slovenia 68 70 71 72 74 73 75 75 77 Malta 78 79 75 74 75 Czech Republic 70 72 70 67 66 65 66 68 69 Hungary 50 49 51 52 53 53 56 59 61 Slovakia 45 46 47 48 47 48 49 51 52 Estonia 34 35 39 40 39 42 43 46 49 Lithuania 34 35 37 39 38 39 41 42 46 Poland 41 42 44 45 46 46 46 46 46 Latvia 30 31 33 34 34 35 37 39 41 New member states - 10 50 50 51 52 53 EU 15 111 110 110 110 110 110 110 109 109 Source: Eurostat (NewCronos, 03 December 2004). Note:P - provsional data. Figure: GDP per capita in purchasing power standards in 2003 by countries Luxem bourg US Ireland Canada Denm ark Austria Netherlands U. kingdom Belgium Australia Sweden Japan Finland France EU 15 Germ any Italy EU 25 Spain Cyprus Greece SLOVENIA Malta Portugal Czech Republic Hungary New Member States Slovakia Estonia Poland Lithuania Latvia y ] 27800 26200 H 26100 1 25800 228 ■ 21400 1291 1740 1730 16400 16000 15900 14700 00 11100 10400 9800 9800 8800 2 25300 25200 25000 4600 4400 100 00 00 0 0 0 5000 10000 15000 20000 Source: Eurostat (NewCronos, 03 December 2004). Note: *new EU member states. 25000 PPS IMAD Development Report 2005 74 Analytical Appendix - Indicators Human development index The human development index (HDI) measures a country's social development in its broadest meaning despite having certain methodological limitations. Hence it measures one of the basic objectives of the Strategy of Slovenia's Development - to sustainably raise the level of welfare for the people living in Slovenia. HDI is supposed to include indicators that reflect countries' achievements in different areas and at different development levels; the current indicators, however, merely reflect minimum differences between the highly ranked countries1. The calculated human development index of Slovenia for 2002 brings a number of positive changes in comparison with previous years. Slovenia namely recorded both a higher index value and a better ranking in 2002. With a significant rise in its index value (from 0.881 to 0.895), it climbed from 29th to 27th place among 177 countries2. In that year, Slovenia also recorded a noticeable increase in the values of all the sub-indices of which the HDI is composed. The biggest change was observed in the education index, the most disputed index in methodological terms3, which rose by 0.02 of an index point compared with 2001. Due to the methodological control, the higher GDP value (in purchasing power standards, per capita in USD) was not reflected in a commensurate rise in this index that merely rose by 0.01 of a point from 2001. According to input subindices, Slovenia is still ranked lowest (33rd) by the life expectancy index whose value totalled 0.85. At the global level there were no significant surprises in the calculated human development index for 2002. Of the 177 countries included in the calculation in 2002, 31% recorded an index value higher than 0.80 (the maximum value is 1.00). A slight increase was seen in the number of countries having an HDI above 0.90 (25), while 35 countries recorded values lower than 0.50. Sierra Leone had the lowest index value (0.273), while East Timor (0.436, rank: 158) was the only non-African country among the last twenty. In both European and global terms Norway remains in the lead. Norway recorded an index value of 0.956 in 2002. It was followed by Sweden (0.946) and the Netherlands (0.942), while Finland was ranked 13th with an index value of 0.935. Greece (0.901) was ranked 24th, Portugal (0.897) was 26th. Slovenia assumed the highest place among the new member states. It is followed by Cyprus (0.883, rank: 30), Malta (0.875; rank: 31) and the Czech Republic (0.868) which remains in 32nd place. Other countries from the new EU member states group have been improving their index values steadily yet still not rapidly enough to move up in their rankings. 1 The human poverty index could perhaps shed some more light on the measures needed to improve the quality of life, yet it is still calculated for only 17 OECD countries. The education index has also been subject to growing criticism for not taking account of the school systems' incomparability and not revealing the population's actual (il)literacy. 2 These changes should be considered with some reserve - namely, input data change due to the revisions of estimates during the years, which is why using data from different annual reports is inappropriate for trend analyses. For easier and more accurate international comparisons, the UNDP calculates and publishes year-on-year trends (in 5-year intervals since 1975); the last published calculation showed, for instance, that the value of the HDI index for Slovenia for 2000 has risen from 0.879 to 0.883. 3 Due to the inadequately chosen methodology of measuring literacy for countries with a high human development level and the differences in the definitions of literacy. Namely, different kinds of literacy (numeric, reading, functional etc.) are an important factor of development hence the UNDP, in addition to its other attempts to adjust methodologies, is developing through UNESCO a new methodology (LAMP - Literacy Assessment and Monitoring Programme) aimed at encompassing different kinds of literacy relevant to both countries with higher and lower levels of human development. IMAD Development Report 2005 5 Analytical Appendix - Indicators Table: Values of the human development index (HDI) and its components for Slovenia in the 1995-2002 period 19951 19971 19981 19992 20002 20012 20022 HDI 0.852 0.864 0.864 0.874 0.8793 0.881 0.895 Global ranking (no. of countries covered) 28. 28. (174) 28. (174) 29. (162) 29. (173) 29. (175) 27. (177) Life expectancy 74.52 74.90 75.00 75.30 75.50 75.9 76.2 Index 0.83 0.83 0.83 0.84 0.84 0.85 0.85 Gross enrolment ratio 79.1 82.0 82.0 83.0 83.0 83.0 90.0 Education index 0.924 0.93 0.93 0.94 0.94 0.94 0.96 GDP in purchasing power standards4 12,600 14,000 14,800 15,977 17,367 17,130 18,540 Index 0.81 0.825 0.83 0.85 0.86 0.86 0.87 Sources: (1999) Human Development Report- Slovenia 1999. Hanzek, M.(ed.). Ljubljana: UNDP, IMAD, p. 17. (2001) Human Development Report-Slovenia 2000-2001. Hanzek, M. (ed.). Ljubljana: UNDP, IMAD, p. 24. (1999-2004) Human Development Report. UNDP Oxford University Press: New York, Oxford. Notes: 'calculations by IMAD, Calculations UNO, 3revised value 0.883 (see note 3 in the text), 4per capita in purchasing power standards (in USD) - figures are not comparable with the calculation of GDP per capita in PPS (see note 1 on p. 72). Figure: Dynamics of human development index values and Slovenia's global ranking in the 1990-2002 period max.1 I I HDI rank > HDI value Source: (1998-2004) Human Development Report. UNDP, Oxford University Press: New York, Oxford. IMAD Development Report 2005 76 Analytical Appendix - Indicators National competitiveness according to the WEF Slovenia's ranking by national competitiveness measured by the WEF's1 growth competitiveness index and business competitiveness index fellfor the second consecutive year in 2004, albeit by one place less than in 20032. Nevertheless, Slovenia retained or even improved its competitiveness relative to that of the EU-25 and EU-15 since its growth competitiveness index actually rose. The value of Slovenia's growth competitiveness index (GCI) has been rising steadily since the 0.06 index-point drop (to 4.64) seen in 2002. In 2004, Slovenia's GCI gained 0.05 of an index point to total 4.75, thereby exceeding the value recorded in 2001. The increase in Slovenia's GCI value in 2004 was by 0.02 i.p. higher than the average GCI increase in the EU-15, which reduced its gap vis-i-vis the world's most competitive/developed countries (at present, Slovenia hence lags behind the EU-15 by 0.38 points). Slovenia's GCI growth in the observed year was also higher than the average change of indices in the EU-25 and the new member states (NMS). Nevertheless, Slovenia's ranking among 104 economies fell below its 2001 level in 20043, from 31st to 33rd place in the overall rankings (since 2003, Slovenia's performance has also been affected by the higher number of countries under observation). The drop in Slovenia's ranking equals the drop of the EU-25, while being smaller than the fall of the NMS (down 4 places) and bigger than that of the EU-15. In terms of its GCI, Slovenia is more competitive than Lithuania, Hungary, Greece, Cyprus, the Czech Republic, Slovakia, Latvia, Italy and Poland, while Estonia and Portugal, which further improved their rankings in 2004, are placed almost beyond reach for Slovenia. Slovenia's position in the business competitiveness index (BCI) also declined for the second year in a row. It was ranked 31st among 103 countries, which is still one place higher than in 2001 (32nd place). Hence the gap between Slovenia's ranking by the BCI and its ranking by GDP p.c. in PPS (27th place) also widened for the second year running, this time from three to four places, which the WEF regards as a warning sign that the microeconomic base in Slovenia is not sustaining the achieved income level which may as a result become unsustainable in the future. In absolute terms, Slovenia's drop in business competitiveness equals the average EU-15 drop and is smaller than the drop of both the EU-25 and NMS. Slovenia scores relatively higher compared to EU countries in its business competitiveness since it is also ranked higher than Malta and Portugal in addition to those countries it already outperforms according to its GCI. Slovenia'sfall in its GCI ranking in 2004 was due to the lower values measured in the indices of technological competitiveness and the macroeconomic environment, while the index measuring the competitiveness of public institutions - Slovenia's main weakness in 2003 - recorded a visible improvement exceeding that of the EU-15. The value of the technology index declined by 0.02 of an index point (to 4.71) compared to the previous year, and Slovenia was ranked 26th in this index, which is two places lower than in 2003. Within the technology index, the largest drop was registered in the innovation sub-index4 (down 0.07 i.p. to 3.44, rank: 23), which is the main national weakness having the relatively lowest value compared to the (high) index value achieved by the highest-ranking country and the relatively high value of the lowest-ranking country. The technology transfer sub-index (4.36) remains one of Slovenia's weaknesses although it moved up in its ranking (from 51st to 46th place). The value and ranking of the information and communication technologies sub-index (ICT) remain essentially unchanged (+0.01 to 5.29, rank: 26). Despite the progress made so far, Slovenia has not yet geared itself up for a more innovative phase of development and remains one of the non-core innovators dependent on technology transfer and, even here, it scores poorly (South Africa is in the lead with 5.54, followed by Slovakia with 5.47). The most visible indicators that contributed to Slovenia's poor performance in technological competitiveness were its low rankings in FDI and technological transfer (88th place), government prioritisation of ICT (61st place), competition quality in Internet service providers (57th place), government success in ICT promotion (53rd place), technology absorption capacity in enterprises (50th place), technological readiness (48th place) and foreign technological licences (45th place). Within the aggregate GCI, the value and ranking of the macroeconomic environment index dropped in 2004 (by -0.01, from 37th to 39th place). Due to the change in methodology in the sub-index measuring the potential inefficiency of public expenditure5 in 2003, Slovenia was ranked 32 places lower in 2004 in this index (to 63rd place) which is, however, still better than in 2002 when it was ranked 68th. In other components of the macroeconomic environment, Slovenia performed better than in 2003, occupying 48th place in macroeconomic stability and 27th place in country credit rating. The biggest positive shift within the aggregate GCI was seen in the public institutions index where Slovenia moved up four places and whose value rose by 0.17 points. Of the components of this index, the value of the contracts and law sub-index dropped by 0.06 i.p. which pushed Slovenia down from 43rd to 47th place. In contrast, Slovenia's corruption sub-index improved significantly (by 0.40 i.p. and moved up 9 places to 23rd position. Slovenia's ranking by the business competitiveness index (BCI) fell by one place in 2004 despite the improved quality of the national business environment and the unchanged estimates of the sophistication of company operations and strategies6. In the business environment quality index, Slovenia moved up from 34th to 32nd IMAD Development Report 2005 77 Analytical Appendix - Indicators place, while the rankings of the EU-15, EU-25 and NMS fell (by 1, 1 and 2 places, respectively). Slovenia's ranking in the sophistication of company operations and strategy index is still relatively good (27th place), whereas the EU-15, EU-25 and NMS dropped in rankings (by 1, 3 and 4 places, respectively). Table: National competitiveness of Slovenia, other EU members and the USA in 2003 and 2004 measured by the WEF's growth competitiveness and business competitiveness indices WEF Report1 2004-2005 Countries3 WEF aggregate indices GCI components BCI components Growth competitiveness (GCI) Business competitiveness index (BCI) Technology index Public institutions Macroeconom. environment Company operations and strategy Quality of the national business environment 04 032 04 032 04 032 04 032 04 032 04 032 04 032 r/v r/v r r r/v r/v r/v r/v r/v r/v r r r r Finland 1 /5.95 1 /6.01 2 1 1 / 6.24 2 / 6.00 3 / 6.48 1 /6.52 3 / 5.47 2/5.54 7 4 1 1 Sweden 3/5.72 3 / 5.80 4 3 4 / 5.80 4 / 6.00 6/6.31 7/6.28 17/4.99 8/5.13 5 3 6 5 Denmark 5/5.66 4/5.61 7 4 6 / 5.34 8 / 5.25 1 / 6.59 1 /6.56 4 / 5.36 5/5.38 9 7 3 3 U.K. 11 /5.30 15/5.23 6 6 18/4.92 16/4.96 7 / 6.23 12/6.01 8/5.11 12/4.99 8 8 4 6 Netherlands 12/5.30 12/5.24 9 9 16/4.98 18/4.93 13/6.08 11 /6.02 7/5.13 9/5.07 6 10 9 11 Germany 13/5.28 13/5.24 3 5 12/5.08 14/5.03 11 /6.21 9/6.10 26 / 4.77 21 /4.78 1 1 5 9 Austria 17/5.20 17/5.07 16 17 22 / 4.85 27 / 4.69 15/5.99 14/5.83 10/5.11 10/5.07 14 13 17 18 Estonia 20/5.08 22 / 4.96 27 28 15/5.01 10/5.16 26/5.59 28/5.36 30 / 4.65 34/4.37 33 36 24 27 Spain 23/5.00 23 / 4.94 26 25 20 / 4.86 25 / 4.72 34/5.16 31 /5.28 16/4.99 17/4.83 25 25 26 26 Portugal 24/4.96 25 / 4.92 33 36 23 / 4.78 22 / 4.82 23/5.69 22/5.52 34 / 4.42 31 /4.41 46 46 33 33 Belgium 25/4.95 27 / 4.88 14 15 31 /4.59 29 / 4.65 22/5.71 27/5.41 19/4.92 19/4.82 11 11 19 17 Luxembourg 21 /4.99 N/A N/A 41 /4.28 42 / 4.30 14/5.99 13/5.92 6 / 5.23 3/5.44 N/A N/A N/A N/A France 27/4.92 26/4.91 12 10 30 / 4.65 28 / 4.67 25/5.62 23/5.50 25 / 4.78 20/4.80 10 9 16 14 Irland 30/4.90 30 / 4.73 22 21 37 / 4.43 38 / 4.37 17/5.87 25/5.46 21 /4.85 22/4.74 22 17 22 22 19/5.03 50 42 21 /4.85 17/4.95 30/5.39 18/5.68 47/4.11 29/4.47 57 47 47 42 Slovenia 33/4.75 31 /4.70 31 30 26/4.71 24 / 4.73 31 / 5.28 35/5.11 39 / 4.26 37/4.27 27 27 32 34 Lithuania 36/4.57 40 / 4.39 36 40 33/4.51 36 / 4.43 43 / 4.75 41 /4.71 33 / 4.46 41 /4.04 36 41 33 41 33/4.61 42 38 29 / 4.66 32 / 4.57 37/5.07 33/5.18 55 / 3.95 38/4.09 47 45 36 37 Greece 37/4.56 35 / 4.58 41 39 38 / 4.42 30 / 4.64 44 / 4.74 42/4.71 31 /4.52 33/4.38 39 39 40 40 Cyprus 38/4.56 N/A 45 N/A 39 / 4.36 N/A 33/5.18 N/A 45/4.14 N/A 56 N/A 39 N/A Czech Rep. 40/4.55 39 / 4.48 35 35 19/4.88 21 /4.84 51 /4.56 47/4.51 41 /4.22 39/4.08 31 33 35 38 Slovakia 43/4.43 43 / 4.23 39 42 28 / 4.67 33 / 4.55 49 / 4.64 51 /4.33 54 / 3.98 50/3.82 40 44 37 42 Latvia 37 / 4.54 29 36 / 4.46 26/4.71 52 / 4.55 45/4.61 37 / 4.27 36/4.31 50 29 46 31 Italy 41 /4.38 24 50 / 4.08 44 / 4.24 48 / 4.64 46/4.56 38 / 4.27 28/4.48 26 24 41 23 Poland 45/4.15 46 45/4.19 34/4.44 80/3.70 58/4.17 51 /4.05 49/3.83 46 43 62 44 EU 25 27/4.90 25 / 4.90 24 26 / 4.78 24 / 4.82 29 / 4.90 27/5.39 28 / 4.64 25/4.63 27 24 26 25 NMS4 34 / 4.57 37 29 / 4.63 26/4.71 43 / 4.87 40/4.85 43/4.21 39/4.14 42 38 39 37 EU 15 20/5.13 20/5.10 15 14 23 / 4.89 23 / 4.88 19/5.82 19/5.71 18/4.93 16/4.92 15 14 16 15 USA 2/5.82 2/5.81 1 2 3 / 5.92 1 / 6.30 21 /5.74 17/5.71 15/5.04 14/4.94 2 2 2 2 Sources: WEF Global Competitiveness Report 2004-2005; WEF Global Competitiveness Report 2003-2004; http://www.weforum.org. Notes: 1WEF Global Competitiveness Report 2004/2005 (the WEF again included two new countries to this year's report and increased the number of returned questionnaires by 11%; on average, there were 84 respondents' replies per country); 2WEF Global Competitiveness Report 2003/2004; 3Reference countries include EU member states and the USA; 4New EU member states; r- ranking, v- index value; bold numbers indicate a rise in the country's competitiveness by at least three places; dark cells indicate a fall in the country's competitiveness by at least three places. 1 World Economic Forum. 2 WEF Global Competitiveness Report 2003/2004. 3 WEF Global Competitiveness Report 2001/2002. 4 In the sub-index measuring the country's innovation capacity there was a change in the questionnaire in 2003: the question 'Does continuous innovation play a major role in generating revenue for your business?' was replaced by the question 'Are companies in the country aggressive in absorbing new technology?'. 5 See Development Report 2004. This sub-index is originally called Government Waste and consists of three components: the extent of distortive government subsidies; the diversion of public funds; and public trust in the financial honesty of politicians. 6 The increased number of countries under observation resulted in Slovenia being placed one rank lower (31 instead of 30). IMAD Development Report 2005 78 Analytical Appendix - Indicators Cross-regional variation in gross domestic product Slovenian statistical regions differ in both the volume and structure of value added, with Central Slovenia standing out notably. Central Slovenia generates over one-third (35% in 2002) of Slovenia's gross value added (GVA). A third of GVA comes from Podravska, Savinjska and Gorenjska together, while the remainder is generated by the eight other regions. Almost three-quarters of Central Slovenia's GVA came from the service sectors, a share that was exceeded only by Obalno-Kraška. Koroška and Southeastern Slovenia generated the largest shares of GVA in manufacturing and in mining and quarrying, Spodnjeposavska and Zasavska in energy, and Notranjsko-kraška in construction. The Pomurska region generates an above-average share of GVA in agriculture. The period between 19961 and 2002 saw a shift in the regional GVA structure to the benefit of the service and industrial sectors. The increase in the service sector's share was largest in Zasavska, Central Slovenia and Pomurska. Of all regions, Zasavska recorded the biggest fall in its shares of manufacturing industries and mining and quarrying (-7.2 p.p.). This was, in turn, reflected in the growing shares of other sectors of the economy in the Zasavska region, primarily of services. Central Slovenia reduced its GVA shares in agriculture, industry and construction and increased its share of services, which is strongly linked to the strengthened administrative role of the capital city located in this region. Discernible changes in the GVA structure were also indicated by the expansion of the industrial sector (along with energy and mining) in Spodnjeposavska, Koroška, South-eastern Slovenia and Notranjsko-Kraška. Central Slovenia also reached the highest level of development measured by GDP per capita. The differences between regions along these lines widened slightly between 1995 and2002. Central Slovenia and Obalno-Kraška have recorded above-average GDP per capita since 1995. In some years during this period, Goriška also drew very close to the average (recording a 3% gap in 2002 and a 1% gap in 1997 when it came closest to the average). Central Slovenia exceeded the Slovenian average by 42% in 2002. This region's GDP per capita rose throughout the analysed period, while the opposite was true for Obalno-Kraška that recorded a GDP of merely 3% above the average in 2002. It was highest above the Slovenian average in 1996 (by 9%). During the entire period, Pomurska had the lowest GDP per capita (recording 69% of the Slovenian average in 2002). Compared to 1995, its gap widened further (by 7 i.p.). The widening of the gap behind the Slovenian average in 1995-2002 was most pronounced in Zasavska (by 11 i.p.). Lignite mines were closed in the region in that period and the number of jobs in the industry dropped, which is also reflected in the GVA structure. Although the region received state aid, it has not yet managed to create enough jobs to make up for these losses. In the 2000-2003 period alone, the number of jobs in the region fell by 11.7%, which was the biggest drop recorded in any Slovenian region. Savinjska, Gorenjska and Notranjsko-Kraška also increased their gaps vis-a-vis the Slovenian average. Regions that recorded the largest reduction of this gap in 1995-2002 were Podravska (by 3 i.p.) and Spodnjeposavska (by 2 i.p.). In that period the ratio of the best-performing to the worst-performing region in terms of GDP per capita increased from 1.8:1 to 2.1:1. Central Slovenia reached 98% of the EU-15 average of GDP per capita and 107% of the EU-25 average, while Pomurska with the lowest GDP per capita achieved just 48% of the EU-15 average and 52% of the EU-25 average (in PPS). IMAD Development Report 2005 79 Analytical Appendix - Indicators Cross-regional differences in gross domestic product per capita, as measured by the coefficient of variation, have been widening slightly since 1995. The coefficient of variation is defined as a ratio of the standard deviation from the average, the formula being adjusted for the regions' different sizes. In 2002 the coefficient of variation rose by 2.3 p.p. compared to 1995 to total a high 25%. If Central Slovenia, enjoying the highest GDP per capita, is excluded from the analysis, the coefficient of variation decreases and comes in at 14.7% to 16.1%. The disparities between these two sets of coefficients indicate that Central Slovenia has a firm role of the national centre of the economy that strongly affects cross-regional variation in Slovenia. Table: Gross domestic product per capita in statistical regions, 2001-2002 Statistical regions GDP per capita in SIT thousand GDP per capita, in PPS1 Index, SLO=100 GVA2 structure in 20023 GVA2 strukture SLO =100% 1995 2002 1995 2002 1995 2002 A to B C to F G to P 2002 Central Slovenia 1,645 3,778 14,374 22,611 138 142 1.3 24.7 74.1 35.0 Obalno-Kraška 1,292 2,753 11,292 16,477 108 103 1.6 23.4 75.1 5.4 Gorenjska 1,073 2,339 9,379 13,996 90 88 2.3 43.6 54.1 8.7 Goriška 1,167 2,575 10,196 15,411 98 97 3.3 39.9 56.8 5.8 Savinjska 1,110 2,372 9,704 14,198 93 89 3.9 46.7 49.5 11.5 South-Eastern Slovenia 1,067 2,401 9,327 14,367 89 90 5.7 48.7 45.6 6.3 Pomurska 903 1,839 7,894 11,004 76 69 10.0 35.5 54.6 4.3 Notranjsko-Kraška 949 2,080 8,295 12,451 80 78 6.5 44.2 49.3 2.0 Podravska 970 2,234 8,475 13,370 81 84 3.9 35.6 60.5 13.4 Koroška 949 2,130 8,293 12,747 80 80 4.0 51.0 45.0 3.0 Spodnjeposavska 978 2,235 8,549 13,378 82 84 6.5 49.8 43.7 2.9 Zasavska 1,005 1,938 8,785 11,598 84 73 2.0 49.4 48.6 1.7 SLOVENIA 1,194 2,664 10,432 15,942 100 100 3.1 35.4 61.4 100.0 EU 15 16,800 23,200 EU 25 15,200 21,200 Source: SORS, calculations by IMAD. Notes: 'PPS - purchasing power standards, 2GVA - gross value added, 3activities according to SCA. Figure: Coefficient of variation in gross domestic product per capita in statistical regions, 1995-2002 27 24 21 18 15 12 Source: SORS, calculations by IMAD. All regions Excluding Central Slovenia 1995 1996 1997 1998 1999 2000 2001 2002 1 Figures on the GVA structure are only available for the 1996-2002 period. IMAD Development Report 2005 80 Analytical Appendix - Indicators Cross-regional variation in unemployment rates In 2004, unemployment fell slightly in most regions, while the gap between regions recording the lowest and highest unemployment also narrowed. After the unemployment rate had been declining irregularly in all regions from 1997 to 2001, it started to rise again slightly in some regions after 2001 (in Koroška, Goriška, Pomurska and Zasavska). The rates of registered unemployment fell as a result of the decrease in the number of unemployed people, which was declining in all regions in 1997-2003, albeit unevenly. The number of unemployed fell because more jobs were on offer in the regions and also due to deletions from unemployment registers for various reasons. After 1997, the registered unemployment rate fell the most in Podravska and South-eastern Slovenia (by 7.8 and 5.6 p.p., respectively) and the least in Pomurska and Koroška (by 1 and 1.2 p.p.). A comparison of 2001 with 2003 reveals a slightly different picture. Podravska and South-eastern Slovenia are still among those regions where registered unemployment dropped the most, while unemployment was up in as many as half the regions (Koroška, Zasavska, Pomurska, Spodnjeposavska, Goriška and Savinjska), most markedly in Koroška. This trend stopped in 2004 when a rise in the unemployment rate was only observed in Goriška. This region has had the lowest rate of registered unemployment for several years, yet it has been rising slowly but steadily since 2002. It is nevertheless still markedly below the Slovenian average (totalling around 65% of the average). Pomurska had the highest rate of registered unemployment in 2004, although it was slightly lower than the year before. Its registered unemployment rate has been falling at a slower pace than in Slovenia on average. Like in 2003, it still exceeded the Slovenian average by almost 60% in 2004. Other regions exceeding the national average were Podravska, Zasavska, Spodnjeposavska, Savinjska and Koroška. The registered unemployment rate was 2.4 times higher in Pomurska than in Goriška. This ratio has been improving since 2000, albeit partly on account of the increase in unemployment in the Goriška region, which is unfavourable. The narrowing of cross-regional disparities in unemployment measured by the coefficient of variation, which began in 2002, continued in 2004. The variation coefficient is a better indicator of cross-regional differences than the ratio between two regions at the two extreme ends. It is defined as a ratio of the standard deviation from the arithmetic mean, taking into account the regions' sizes. The coefficient reached its lowest value in 1999 (29.8%). Thereafter it began to rise slowly, peaking in 2002 (34.8%), after which it started to fall again and totalled 30.7% in 2004. If this trend continues in the future, we can expect a further reduction of cross-regional disparities. Structural unemployment is still a major problem, surfacing in a specific way in each region, including those with below-average registered unemployment rates. Although long-term unemployment has seen a continued decline in all regions, it remains a serious concern in most regions. It is highest in Spodnjeposavska, where more than 50% of the unemployed have been out of work for over a year. Long-term unemployment is also high in South-eastern Slovenia, despite its below-average registered unemployment rate, and in Podravska, Pomurska, Savinjska, Zasavska and Koroška. This tends to be related to the poor education structure of the unemployed, as is the case in South-eastern Slovenia and Pomurska. On the other hand, people who have completed higher education may also find it difficult to get a job. The share of the unemployed with a higher education continued to increase in 2004; these shares were the largest and above the national IMAD Development Report 2005 81 Analytical Appendix - Indicators average in Central Slovenia, Goriška, Obalno-Kraška, Notranjsko-Kraška and Gorenjska. People aged 40+ also have poor employment prospects. Although their share has generally been falling since 2001, they still account for almost 50% of all unemployed in the Gorenjska and Spodnjeposavska regions. In some regions the rise in female unemployment came to a halt; nevertheless women still represent more than half of all unemployed people in most regions. Tabela: Registered unemployment and employment rates by regions, 1997-2004 Registered unemployment rate, % Registered employment rate, % 1997 2002 2003 2004 1997 2002 2003 2004 SLOVENIA 14.4 11.6 11.2 10.7 53.7 55.9 55.3 55.7 Central Slovenia 10.2 7.9 7.8 7.8 57.0 58.9 58.4 58.2 Obalno-Kraška 11.0 8.6 8.3 8.1 54.0 56.6 56.2 56.4 Gorenjska 12.0 8.5 8.3 7.9 54.5 56.6 56.4 56.7 Goriška 9.6 6.3 6.4 6.9 55.2 57.9 57.2 57.1 Savinjska 16.1 14.0 13.5 13.0 53.6 55.1 54.6 54.9 South-eastern Slovenia 14.0 9.9 8.6 8.4 55.8 58.9 58.1 58.5 Pomurska 17.8 17.6 17.5 16.8 52.6 53.5 51.9 53.0 Notranjsko-Kraška 12.0 9.1 8.8 8.3 54.9 58.7 58.6 59.0 Podravska 22.4 17.6 16.2 14.8 48.0 51.1 50.8 51.6 Koroška 13.0 11.6 12.6 11.9 52.1 54.6 53.1 53.7 Spodnjeposavska 16.4 14.4 14.9 13.4 52.9 54.6 52.9 53.8 Zasavska 17.9 15.3 16.1 15.1 50.0 52.6 52.0 52.3 Source: SORS, calculations by IMAD. Figure: Variation coefficient of regional unemployment in Slovenia in 1997-2004, in % Source: SORS, calculations by IMAD. Indicators of economic development Macroeconomic stability Knowledge-based society Competitiveness of the economy Developmental role of the state Macroeconomic stability IMAD Development Report 2005 86 Analytical Appendix - Indicators Real growth of gross domestic product The revision of the national accounts resulted in a minor change of the GDP estimate for 2002 and the first release of the 2003figure. After the SORS' last release of the revised annual national accounts estimate since 2000 (in September 2004), the estimate of economic growth for 2002 was 0.1 p.p. below the earlier estimate (3.3% instead of 3.4%), while the estimates for 2000 and 2001 remained the same (3.9% and 2.7%, respectively). The first annual economic growth estimate for 2003 was 2.5%, which is 0.2 p.p. above the estimates based on quarterly figures and at the same time the lowest figure after 1992. The cooling down of economic growth in Slovenia in 2003 was induced by the modest growth of foreign demand, even more so than in the two previous years when economic growth was also below the average of the previous medium-term period (4.4% in the 1996-2000 period). Despite this substantial slowdown, GDP growth in 2003 was nevertheless more than 1.5 p.p. above the averages of the EU-15 (0.8%) and EU-25 (0.9%). The economic situation in 2003 was strongly affected by the unfavourable trends in the international economic environment. There was also a shift in the GDP growth structure. The modest real export growth in 2003 (3.2%, compared with 6.7% in 2002) was mainly due to the weak economic growth in Slovenia's main trading partners in the EU1. Unlike 2002, 2003 also saw a drop in the levels of exports to the countries of former Yugoslavia, except Croatia. Exports to Russia and the CEFTA countries sustained their relatively strong growth from the previous year. On the other hand, domestic demand gained momentum in 2003 after a three-year period of modest growth, which led to changes in the GDP growth structure. Total domestic demand rose by 4.7% in real terms and became the main driving force of the growth. For the first time after 1999, domestic consumption growth (2.7%; 0.3% in 2002) exceeded GDP growth. It was largely spurred on by the beginning of the new purchasing cycle enabled by the disburdening of income from old loans and new borrowing opportunities with significantly improved terms. Gross investment growth also picked up to total 10.5%. Within this growth, gross fixed capital formation rose by 6.3% (mainly as a result of investment in motorway construction). The contribution of inventories to economic growth was also substantial (1.1 p.p.). The high growth of domestic demand influenced the stronger import growth which, coupled with the laggard export growth, resulted in the high negative contribution of the foreign trade balance to economic growth (-2.2 p.p.). In thefirst three quarters of2004, economic growth picked up markedly (4.5% year on year). It was largely underpinned by accelerated export growth and maintenance of the relatively high growth rates of domestic demand. In the final quarter of 2003, economic growth began to strengthen (from 2.6% in Q3 to 2.9%) on the back of the stronger real export growth, notably in the EU, and the sustained high export growth to the CEFTA countries and Russia. GDP continued to grow rapidly in 2004 to average out at 4.5% in the first three quarters of the year. Real GDP growth in the third quarter (4.9% year on year) was slightly higher than the growth in the first and second quarters and was also the highest quarterly growth since 2000. Like in the first half of the year, it was generated more by exports and than domestic consumption. The high export growth was largely the result of one-off effects prior to EU accession and the pick-up in economic growth in the EU. Although real export growth fell slightly in Q3 over Q2 (from 13.7% to 11.9%), it recorded a much higher average rise in the first three quarters than in the year before (11.6% over 3.2%). The slowdown in the robust growth of foreign trade from the second quarter implies that this growth was driven mainly by the one-off effect of adjustments to changes in the foreign trade regime since the growth rates of exports to the countries of former Yugoslavia fell markedly, especially to Macedonia and BiH. Export growth to the EU-25 continued to intensify in Q3, notably to Italy and France. The growth of exports to the new EU countries and Austria also remained at a high level, while it slowed down to Germany. Similarly, Q3 saw continued export growth to some non-EU countries - Russia, Serbia and IMAD Development Report 2005 87 Analytical Appendix - Indicators Croatia. Against the background of the relatively high sustained growth rates, the slightly faster deceleration in import growth in Q3 resulted in the positive contribution of foreign trade to economic growth (after its contribution had been negative for a year and a half). Within domestic consumption, which rose by 4.7% in real terms in the first nine months, the relative contribution of final consumption strengthened in the third quarter. The growth of final consumption rebounded slightly in the third quarter (3.4% year on year). It was primarily based on the stronger growth of private consumption (3.8% over 3.1% in Q2) and partly of government consumption (2.4% over 1.6%). The growth of gross fixed capital formation was high in Q1 (7.9% year on year) and remained at a level above 6% in Q2 and Q3, while recording a change in its structure in Q3 in favour of construction investment. The positive contribution of changes in inventories to economic growth, which was particularly high in Q2 (1.8 p.p. over 0.6 p.p. in Q1), turned into a negative contribution in Q3 (-0.2 p.p.). According to Eurostat's first release, real GDP growth in the EU-25 totalled 2.1% in the first three quarters of2004. In these three quarters, the highest average real GDP growth was seen in Q2 (2.4%). The year-on-year growth rates recorded in the new EU member states in the first nine months generally exceeded the average of the EU-25 (except for Malta, 0.6%) and ranged between 3.7% (Czech Republic, Cyprus) and 8.5% (Latvia). Real GDP growth in Slovenia's main trading partners in the same period totalled 1.2% in Germany, 1.1% in Italy, 1.9% in Austria and 2.2% in France. In these countries economic growth picked up in comparison with 2003. Table: Contribution of expenditure components to gross domestic product (GDP) growth in Slovenia in 1996-2003 1996 1997 1998 1999 2000 2001 2002 2003 Real GDP growth, in % 3.6 4.8 3.6 5.6 3.9 2.7 3.3 2.5 Contribution of individual components to GDP growth, in p.p. Foreign trade balance 0.2 -0.3 -1.8 -3.9 2.4 1.7 1 -2.2 Private consumption 1.6 1.5 1.7 3.4 0.2 1.3 0.2 1.5 Government consumption 0.6 0.4 1.1 0.6 0.5 0.8 0.3 0.5 Gross fixed capital formation 2.3 3.0 2.4 5.4 0.2 1.0 0.8 1.6 Changes in inventories and valuables -1.1 0.2 0.2 0.1 0.6 -2.1 1.0 1.1 Source: SORS. Figure: Average GDP growth rates by countries in 1995-2000 and 2001-2003 □ 1995-2000 average ■ 2001-2003 average WfaTtmfl Source: Eurostat (NewCronos, 03 December 2004); SORS. Notes: figures for the Czech Republic are included from 1996 on; in the EU-25 aggregate figures for Malta are included from 1999. *New member states. 1 Like Slovenia, EU countries recorded their lowest economic growth after 1993 in 2003. IMAD Development Report 2005 88 Analytical Appendix - Indicators Employment rate The employment rate1, which is relatively high in Slovenia (around 63% since 1997), has been rising rapidly since the final quarter of2003. The male employment rate rose from around 68% (after having fallen to 66.6% in Q1 of 2003) to 71.5% in Q3 of 2004, while the female rate was up from about 59% to 62.0% of the working-age population2 (after having dropped to 57.6% on average in 2003). Compared with the EU average, where the employment rate rose relatively fast in the last ten years, Slovenia's male employment rate was slightly lower while the female employment rate was higher (see table). Regarding age, the employment of youth (15-24 years) and elderly people (50+) is below the EU average (employment is worryingly low in the 55-64 age group, where the Lisbon goal is set at 50% by 2010, while the Slovenian figure for 2003 was 23.5%). The gap in youth employment was due to the relatively high youth enrolment in secondary and tertiary education (see the indicator on the population that has completed secondary education) and the relatively high youth unemployment compared with the EU average. The employment rate of the elderly is linked to the high structural unemployment that mainly affects older unemployed people (see the indicator on the unemployment rate). The lower employment rate of people aged over 50 was also due to the relatively early retirement, although the average retirement age is rising - in 2003 it stood at 57 years and 8 months for the old-age pension and 51 years and 8 months for the disability pension (in 1995 the respective ages were 55 years and 7 months and 47 years and 1 month) - yet it is still below the EU average (59.9 years). In addition, the low employment figures for the elderly are in part still attributable to the mass early retirements witnessed at the beginning of the 1990s. The higher employment rate seen in 2004 was largely generated by the strong rise in informal employment that followed the higher economic growth, whereas formal employment continued to increase at a relatively slow pace. The number of people in employment according to the labour force survey, which fell by 0.7% in 2002 and by 1.4% in 2003, rose substantially from Q4 of 2003 to Q3 of 2004. Compared to 2003, their average number was up 5.7% in 2004. Since the monthly figures on the number of formally employed workers (i.e. employees) and those who are self-employed (farmers, individual private entrepreneurs and own-account workers) for 2004 indicate a smaller rise (only 0.6%), we can infer that different types of informal employment3 which had been in decline in previous years surged again in 2004 (up 38.3% over 2003). According to the monthly statistics, business services recorded the relatively highest rise in formal employment in 2004. The total number of people in formal employment as measured by the monthly statistics (covering employees and self-employed workers) rose by 0.6% in 2004, primarily in business services (up 4.3%). A relatively high increase (2.7% or more) was registered in the public administration, health and social work, and agriculture, while in financial intermediation and education it was up 2.2%. In relative terms, the largest drops were seen in mining and quarrying (down 9.6%) while in absolute terms, employment fell most markedly in manufacturing (by 2,103 or 0.9%) and transport (by 1,139 or 2.3%). It also dropped in fishing, electricity, gas and water supply, and in private households. In all other groups of activities, employment either stagnated or its growth remained below 1%. Within manufacturing, there was a sharp rise in employment in the car and machinery industries concurrent with a drop in the textile, leather andfood-processing industries. The number of people in employment rose in just four manufacturing sub-industries, three of which also recorded high employment growth: 5.4% in the manufacture of transport IMAD Development Report 2005 89 Analytical Appendix - Indicators equipment, 4.2% in the manufacture of machinery and equipment, and 2.7% in the manufacture of rubber and plastic products. In the manufacture of chemicals and chemical products, employment edged up a mere 0.2%. All other sub-industries within manufacturing saw a drop in the number of people in employment in 2004, which was most pronounced in labour-intensive industries, notably the textile, leather and food-processing industries where it dropped by 6.6%, 5.0% and 3.0%, respectively. Table: Employment rates (people aged 15-64) according to labour force surveys in Slovenia and the EU in 1995-2004 (Q2), in % 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Slovenia (15-64) 62.9 61.7 62.8 63.5 62.5 62.7 63.6 64.3 62.5 65.6 Men 67.7 66.0 67.1 67.5 66.8 66.7 68.5 68.7 67.2 69.9 Women 58.0 57.5 58.4 59.5 58.1 58.5 58.6 59.8 57.7 61.3 15-24 33.8 35.5 38.5 36.2 32.9 31.2 30.3 31.1 28.6 33.8 25-49 87.0 82.0 81.3 82.2 82.2 82.6 83.8 84.1 82.6 84.0 50-64 35.8 19.9 22.7 25.9 23.4 22.3 23.4 25.9 22.7 30.1 EU 15 (15-64) 59.9 60.1 60.4 61.1 62.2 63.2 64.0 64.2 64.4 n/a Men 70.3 70.0 70.3 71.0 71.7 72.5 73.0 72.9 72.6 n/a Women 49.6 50.1 50.6 51.3 52.7 53.9 54.9 55.5 56.1 n/a 15-24 37.2 36.4 36.4 37.6 38.7 39.9 40.6 40.5 39.7 n/a 25-49 73.2 73.4 73.7 74.3 75.4 76.4 77.1 77.2 77.3 n/a 50-64 35.8 36.1 36.4 36.4 36.9 37.5 38.3 39.8 41.6 n/a EU 25 (15-64) n/a n/a n/a n/a n/a 62.2 62.8 62.8 63.0 n/a Men n/a n/a n/a n/a n/a 71.1 71.3 71.0 70.8 n/a Women n/a n/a n/a n/a n/a 53.5 54.2 54.7 55.1 n/a 15-24 n/a n/a n/a n/a n/a 37.6 37.9 37.5 36.7 n/a 25-49 n/a n/a n/a n/a n/a 77.1 77.6 77.5 77.6 n/a 50-64 n/a n/a n/a n/a n/a 36.4 37.1 38.5 40.1 n/a Source: SORS; Eurostat (NewCronos). Figure: Employment rates in Slovenia and other EU member states1 in Q2 of 2004, in % 80 -i- 70 - Source: Eurostat. Note: 1 No data are available for Germany, Greece, Italy and Luxembourg. 1 Calculated using survey data that also include informally employed people who can, in principle, at the same time be students among the young, or retired people among the elderly. 2 Employment rate is calculated as the ratio between persons in employment aged 15-64 and total population of the same gender and age. 3 Informal employment includes people who work either as unpaid family workers, on contractual basis or in the shadow economy. IMAD Development Report 2005 90 Analytical Appendix - Indicators Unemployment rate In 2004, registered unemployment continued to fall; survey unemployment also declined after the halt seen in 2003. The number of people registered as unemployed hovered around 125,000 in 19931998 while the registered unemployment rate was between 14% and 14.5%. Up until 2001, the number of the registered unemployed fell to an average of 102,000 and the registered unemployment rate to 11.6%. In 2002, both the number and rate of registered unemployment stayed at the level of the previous year, while they again dropped slightly in 2003 and 2004. The average number of people registered as unemployed was 92,826 in 2004 (90,728 in December), while the average rate of registered unemployment totalled 10.6%. The number of unemployed people according to the labourforce survey hovered around 70,000 in 1995-2000, while the survey unemployment rate ranged between 7% and 8%. The number of unemployed dropped to 62,000 by 2002, then rose to 64,000 in 2003 and remained at that level (on average) in 2004. The survey unemployment rate, which had already dropped to 6.4% in 2001 and 2002, rose to 6.7% in 2003, then fell to 6.3%' in 2004. Slovenia's unemployment measured by the international methodology has been below the EU average ever since it started to be measured and has hovered around the average of the OECD countries. Registered unemploymentflows in 2004show a comparatively morefavourable picture than in previous years. For the first time in four years, the number of unemployed people who found a job in 2004 was higher than the year before. 54,257 unemployed people were hired (7.4% more than in 2003). The figure includes the substantial rise in jobs subsidised through active employment policy measures (up 30.1%). Within these jobs, the number of participants in the public works scheme increased after several years of decline (up 28.9%). Other subsidies recorded a 33.5% rise last year. Non-subsidised jobs that accounted for 86.7% of the total hiring of unemployed people in 2004 was up 4.6% compared with 2003. Up until November it seemed that the inflow into unemployment due to a job loss, which had been rising since 1999, would be lower than the year before in 2004. December's inflow, however, was very high, therefore a total of 69,577 employees lost their jobs in 2004 (1.1% more than in 2003). The annual inflow of first-time job-seekers was again slightly higher than in 2003 (up 2.2%), while the number of deletions for other reasons decreased by 1.6%. The deletions from unemployment registers for other reasons were mostly voluntary or due to a failure to report at the employment service offices (17,600); in addition, over 4,000 deletions were due to retirement and over 7,000 due to a return to education activities. A further 2,268 people were transferred to another register in 2004 in accordance with other laws2, which was 70% less than in 2003. The overall number of people registered as unemployed thus dropped by 5.5% by the end of 2004 compared with December 2003. The structure of registered unemployment is changing: the shares of older, long-term and unskilled unemployed people are declining while the shares of unemployed first-time job-seekers and women are on the increase. This was partly due to high deletions from unemployment registers for various job-unrelated reasons, in addition to targeted active employment policy measures, especially subsidies for new jobs and training programmes for the unemployed. The average share of women already exceeds 53% (52.8% in 2003), while the share of first-time job-seekers totalled 25% (23.2% in 2003). The share of young unemployed people remains almost unchanged (26.2%). On the other hand, the share of the unemployed aged over 40 dropped to below 43% (compared with 44.1% in 2003 and 51.7% in 2000 when it was the highest). The shares of jobless people also fell in the following groups: people aged over 50 (21.0% over 21.4% recorded in 2003 and 27.5% in 2000), the long-term unemployed (46.2% over 48.6% in 2003 and 63.7% in 1999) and the unskilled unemployed (41.6% over 44.2% in 2003 and around 47% in the 1995-2002 period). The average duration of unemployment shortened by over 2 months (to 22 months and 24 days) compared with 2003. Both the registered and survey female unemployment rates remained significantly higher than the respective male unemployment rates (see table). Youth unemployment (ages 15-24) remains relatively high, although it is falling. The government continues to pursue the goals of the National Programme of the Labour Market Development and Employment by 2006 and the European Employment Strategy. Since 1999, the Slovenian government's employment policy has taken into consideration and applied the European Union's recommendations and guidelines in the field of employment. In September 2004, the government adopted its first National Action Plan for Employment3 which is entirely on a par with the national plans of the EU member states in content and form and is adjusted to both the European Employment Strategy and the Lisbon employment obj ectives. The key activities include raising the education levels or vocational IMAD 91 Development Report 2005 Analytical Appendix - Indicators qualifications of the labour force, reducing structural imbalances (cutting the shares of long-term unemployed people and the unemployed with no vocational training), the participation of all young unemployed people who have not found work within 6 months and all other people out of work for 12 months or more in active employment policy programmes, reducing regional imbalances in the labour market, control over fulfilment of the obligations of unemployed people, preventing the shadow economy and illegal employment, and further development of the social partnership. Table: Unemployment rates in Slovenia, the EU and OECD in the 1995-2004 period, in % 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Survey unemployment rate Slovenia 7.41 7.3 7.4 7.9 7.6 7.0 6.4 6.4 6.7 6.11 men 7.71 7.5 7.1 7.7 7.3 6.8 5.9 5.9 6.4 5.71 women 7.01 7.0 7.6 8.1 7.9 7.3 7.0 6.8 7.1 6.41 young people (aged 15-24) 18.8 18.8 17.6 18.6 18.1 16.8 18.1 16.7 17.4 14.21 EU 25 n/a n/a n/a 9.4 9.2 8.8 8.5 8.9 9.1 8.91 EU 15 10.1 10.2 10.0 9.4 8.7 7.8 7.4 7.7 8.1 7.91 OECD 7.7 7.7 7.4 7.1 6.8 6.3 6.5 6.9 7.1 Registered unemployment rate Slovenia 13.9 13.9 14.4 14.5 13.6 12.2 11.6 11.6 11.2 10.6 men 14.1 13.7 13.6 13.4 12.4 11.1 10.4 10.4 9.7 9.1 women 13.7 14.0 15.3 15.7 15.0 13.5 12.9 13.1 13.0 12.4 Source: SORS, Eurostat, OECD. Note: 1Q2. Figure: Survey unemployment rate in Slovenia and other EU countries, Q2 of 2004 1 The IMAD's calculations based on the quarterly data released by the SORS. 2 Pursuant to amendments to the Employment and Insurance Against Unemployment Act, Rules on the Contents and Method of Keeping Public Employment Records were adopted in October 2002, determining the criteria for the transfer of people from unemployment registers to registers established in accordance with other laws. These criteria were laid down by the Employment Service of Slovenia (ESS) in co-operation with the competent institutions referred to in each particular law. The transfer to other records is based on an employment plan. In accordance to these Rules, in co-operation with the Pension and Disability Insurance Institute (PDII), the ESS prepared a regulation for disabled workers - recipients of the PDII's disability allowance. The institutes began to examine the employment prospects of disabled workers and to establish the criteria for their transfer to unemployment register based on other laws. The following categories were taken into consideration: (i) people registered at the ESS for at least two years; (ii) people who were sent to employers but failed to get a job due to their disability; (iii) people for whom no suitable jobs were available during the period; and (iv) people who remained jobless even after having participated in the active employment policy programme. 3 A new programme aimed at achieving strategic goals in the area of labour market and employment in 2005, to be distinguished from the similarly titled programme adopted by the government in December 2003 for the implementation of employment goals in 2004. IMAD Development Report 2005 92 Analytical Appendix - Indicators Inflation After having persisted at the 7°%-10o% level in 1995-2002, inflation fell to below 4% in 2004. Inflation's fluctuation at a relatively high level in the period after 1995 was mainly the result of economic policies that had not pursued price stability as their main goal, i.e. their irresponsiveness to changed macroeconomic conditions. In part, the long-lasting high inflation levels were also fuelled by the unfinished structural reforms related to indexation, to the composition and level of general government expenditure and to the increase in efficiency (restructuring) in sectors where competition is still insufficient. The sustainable lowering of inflation seen in the past two years has resultedfrom coordinated measures carried out by the Bank of Slovenia and the government of RS. When the BS and the government decided to enter the exchange rate mechanism ERM II and to introduce the euro early, they adopted measures that have led to a sustainable lowering of inflation in the last two years. While in 2003 the main driving forces behind the inflation decline were measures taken through administered prices and fiscal policies, the further lowering of inflation seen in 2004 was essentially hinged on the tolar exchange rate's stabilisation upon entry to the ERM II at the end of June. Taking into account the almost complete pass-through of the exchange rate rises to price rises, the tolar's exchange rate stabilisation abolished a key inflationary factor which in previous years had contributed around 50% to overall price rises. Nevertheless, the year-on-year growth of the exchange rate totalled 1.3% due to its gradual depreciation seen in the first half of 2004. Simultaneously, the government continued to carry out the Administered Prices Rise Plan for 2004 and 2005 and co-ordinated the adjustment of fiscal burdens. In contrast to 2003, the main objective of administered prices policy (to ensure consistent rises of administered and market-determined prices) was not achieved in 2004. However, the faster growth of administered prices (up 9% in 2004) than market-determined prices (up 2.1%) was chiefly attributable to external factors. Higher prices of oil and hence of liquid fuels for transport and heating contributed 1.0 p.p. to inflation (71% of the overall administered prices increase). As oil price changes have a comparatively stronger impact on inflation in Slovenia than in other EU countries (due to the bigger share of fuels in the price index, the relatively low tax share in retail prices and the economy's relatively high dependence on fuels), the government also continued its counter-cyclical adjustment of excise duties on liquid fuels for transport and heating, thereby cushioning the volatility of liquid fuels prices (when oil prices surged by about 70%, the adjustment of excises prevented an additional increase of inflation of 0.4 p.p.). Higher excise duties on liquid fuels contributed 0.2 p.p. to end-year inflation; another 0.2 p.p. came from the further harmonisation of excises on tobacco products with the EU tax system. Slovenia's entry to the EU contributed to the further reduction of inflation. In addition to the tolar's exchange rate stabilisation following entry to the ERM II, EU accession also led to changes in trade regimes, particularly the elimination of customs duties on food products. At the end of 2004, food prices were lower than the year before which is why inflation was 0.2 p.p. lower in 2004 compared to their 0.8 p.p. contribution to inflation in 2003. In spite of its considerable lowering, inflation still deviates sharplyfrom the Maastricht criterion. The Maastricht criterion, calculated on the basis of average (HICP1) inflation, totalled 2.2% in December 2004, while the average (HICP) inflation in Slovenia came in at 3.7% at the end of 2004. The further sustained lowering of inflation that will enable the fulfilment of the Maastricht criterion in 2006 in accordance with the Programme for IMAD Development Report 2005 93 Analytical Appendix - Indicators Entering the ERM II and Introducing the Euro will thus require not only the strict implementation of the adopted policies, but above all the reduction of factors creating upward pressure on inflation due to structural imbalances. Table: Consumer price rises in Slovenia and the EU in 1995-2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Slovenia, year-on-year growth rates, in % Consumer prices 9.0 9.0 8.8 6.5 8.0 8.9 7.0 7.2 4.6 3.2 Goods 7.1 8.0 8.5 5.6 7.8 8.8 6.2 6.4 3.9 2.5 Services 15.9 12.2 9.8 9.3 8.8 9.2 9.6 9.4 6.5 4.9 Administered prices 10.0 8.4 16.9 11.1 10.4 16.0 10.5 9.2 4.0 9.0 Energy 8.2 5.6 20.9 13.2 11.0 18.9 6.7 5.5 3.5 10.3 Other 11.4 10.6 12.4 8.6 9.6 12.0 17.0 14.7 4.8 6.1 Core inflation N/A 7.2 6.4 5.0 4.1 6.9 7.4 6.9 4.2 2.7 European Union1, year-on-year growth rates, in % Consumer prices 2.5 2.1 1.5 0.9 1.7 2.5 2.0 2.4 2.0 2.3 Source: SORS (consumer prices), IMAD's estimates (administered prices, core inflation), Eurostat (consumer prices in EU). Note: 1euro area. Figure: Average inflation (HICP) in Slovenia and the Maastricht criterion -Maastricht criterion, EU 25 * « - - _ » ... -CPI, Slovenia « ■ - - - - - IC P lo ve ni a Jan 01 1 Mar 01 1 May 01 1 Jul 01 1 Sep 01 1 Nov 01 ] Jan 02 ] Mar 02 May 02 Jul 02 Sep 02 Nov 02 Jan 03 1 3 0 ar M May 03 Jul 03 Sep 03 Nov 03 Jan 04 ] Mar 04 May 04 Jul 04 Sep 04 Nov 04 Source: SORS, Eurostat, IMAD's estimate. Note: inflation in Slovenia: Expressed as CPI until 2003 and as HICP thereafter. 1 The Harmonised Index of Consumer Prices (HICP) is based on the composition of expenditure of residents and non-residents in Slovenia, while the Consumer Price Index (CPI) is based on the expenditure composition of Slovenian residents. Due to the different weighting of goods and services, the values of the two indices differ; however, the difference in average inflation measured by both indices did not exceed 0.1 p.p. in the past two years. IMAD Development Report 2005 94 Analytical Appendix - Indicators General government sector balance Since Slovenia entered the European Union it has had to adhere to the provisions of the Stability and Growth Pact, according to which the general government sector deficit must not exceed 3% of GDP. In line with the EU rules Slovenia has to submit the 'Report on Government Debt and Deficit' to the European Commission twice a year which enables the Commission to monitor Slovenia's public finance position. The report is prepared in compliance with the uniform methodology of the European System of Accounts of 1995 (ESA-95) that has to be strictly observed by all member states. The upper ceiling of the allowed budget deficit (3% of GDP) equals the Maastricht convergence criterion that Slovenia has to meet prior to entering the EMU (foreseen for the beginning of 2007). Slovenia fulfilled this criterion in the 2001-2003 period and, according to preliminary estimates, also in 2004. In 2000, the share of the general government sector deficit in GDP totalled 3.4% and decreased gradually over the next three years. In the period from 2000 to 2003, the general government sector deficit fell by 1.4 p.p. from the 3.4% of GDP recorded in 2000 to 2% of GDP in 2003. The general government sector deficit narrowed most markedly in 2001 (by 0.6 p.p. to total 2.8% of GDP); in the next two years, it shrank by a further 0.4 p.p. per year (to 2.4% of GDP in 2002 and to 2% of GDP in 2003). The gradual narrowing of the general government sector deficit was largely underpinned by the increase in overall general government sector revenues. In 2000, the share of general government sector revenue in GDP totalled 44.7% (according to the ESA-95 methodology). In the period from 2001 to 2003, this share was rising gradually: by 0.4 p.p. in 2001, by 0.6 p.p. in 2002 and by a further 0.5 p.p. in 2003. On the whole, the share of general government sector revenue in GDP rose by 1.5 p.p. in the 2000-2003 period to total 46.2% of GDP in 2003. Overall general government sector expenditure similarly increased during this period, edging up from 48.1% of GDP in 2000 to 48.2% of GDP in 2003. The improvement in the fiscal position in 2001 when the general government sector deficit narrowed by 0.6 p.p. was mainly driven by the sale of mobile telephony licences which, according to the national accounts methodology, counts among the sale of non-financial non-produced assets, thus reducing general government sector expenditure. Excluding this transaction, general government sector expenditure rose by a further 0.4 p.p. that year. An actual improvement in the general government's position occurred in 2002 when the increase in the share of its revenue (up 0.6 p.p.) exceeded the increase in the share of its expenditure (up 0.2 p.p.). 2003 saw a continuing improvement in Slovenia's fiscal position as the general government sector deficit shrank to 2% of GDP. The shares of general government sector expenditure in GDP were up 0.1 p.p., while the shares of general government sector revenues in GDP rose by 0.5 p.p. According to preliminary estimates for 2004, the general government sector's fiscal position did not change fundamentally relative to 2003. The share of general government sector expenditure in GDP is estimated to have remained at the same level as in 2003, while the share of general government sector revenue edged down 0.1 p.p. In our estimate, the share of revenues from customs duties and import taxes in GDP fell by 0.3 p.p. due to Slovenia's accession to the EU. The share of revenues from compulsory social security contributions fell by 0.1 p.p. (according to preliminary data). The shares of revenues from personal income tax, corporate income tax and excise duties in GDP each rose by 0.1 p.p.. The share of general government sector deficit is thus estimated at 2.1% of GDP, indicating a slight deterioration relative to 2003 (the deficit widened by 0.1 p.p.). IMAD Development Report 2005 95 Analytical Appendix - Indicators Compared with other EU countries, Slovenia had one of the highest general government sector deficits in 2000. Just a few other acceding countries (the Czech Republic, Slovakia and Malta) recorded an even bigger deficit in that year. In 2000, the EU-15 even achieved an average general government sector surplus totalling 1% of GDP, and the EU-25 on average recorded a surplus of 0.8% of GDP. In the 2001-2003 period, the share of the general government sector deficit in GDP was narrowing in Slovenia whereas it was generally increasing in the EU. Although in 2001 the share of the general government sector deficit shrank in Slovenia it was still 1.7 p.p. above both the EU-15 average (1.0% of GDP) and above the EU-25 average (1.1% of GDP). Only Portugal among the EU member states and the Czech Republic, Hungary, Malta, Poland and Slovakia among the acceding countries recorded a higher deficit in that year. In 2002, the share of the general government sector deficit in GDP narrowed further in Slovenia (to 2.4%); nevertheless, it still exceeded the EU average (2.0% of GDP in the EU-15 and 2.1% of GDP in the EU-25). In 2002, the share of the deficit in GDP increased by one whole percentage point in European countries. Among EU member states, Portugal, Germany and France had a higher deficit than Slovenia that year, while all of the acceding countries except Estonia and Lithuania recorded a bigger deficit. In 2003, the deficit as a share of GDP widened further in other European countries while dropping slightly further in Slovenia where it fell to below the average of the EU-15 (2.6% of GDP) and the EU-25 (2.7%). As many as 12 EU countries recorded a higher budget deficit than Slovenia that year, 10 of which overshot the allowed ceiling set by the Stability and Growth Pact. Table: Shares of general government sector revenue, expenditure and deficit by subsectors, according to ESA-95 methodology in % of GDP 2000 2001 2002 2003 General government revenue 44.7 45.1 45.7 46.2 General government expenditure 48.1 47.9 48.1 48.2 General government deficit (revenue minus expenditure) -3.4 -2.8 -2.4 -2.0 Central government -3.0 -2.5 -2.1 -1.9 Local government 0.1 0.0 -0.2 0.0 Social insurance funds -0.5 -0.3 -0.1 -0.1 Source: SORS, National accounts, First Release No. 128 of 31 August 2004, calculations of shares in GDP based on SORS First Release No. 149 of 22 Sept. 2004. Figure: Shares of general government sector deficit/surplus in the EU-25 in 2000 and 2003, % of GDP □ 2000 □ 2003 fi n n ----fb II lRITflï 1 III 111 P_M_M ■ Il IttI ' o an < i? tu c/3 Source: Eurostat: Euro-indicators, 16 March 2004. IMAD Development Report 2005 96 Analytical Appendix - Indicators General government debt In 2003, general government debt1 decreased by 0.1 of a percentage point relative to GDP, mainly due to the fall in the relative debt share of direct budget users which totalled 29.4% of GDP at the end of the year. In nominal terms, general government debt rose during the same period to total SIT 1,687.2 bn at the end of 2003 (SIT 1,569.3 bn at the end of 2002). Central government debt rose by SIT 104.3 bn and amounted to SIT 1,628.8 bn, equalling 28.3% of GDP (28.7% of GDP at the end of2002). The debt of the state budget's direct users increased by SIT 62.5 bn from 1 January 2003 and totalled SIT 1,467.3 bn on 31 December 2003. SIT 18.4 bn thereof came from financing general government revenues, expenditure, lending and repayments, SIT 15.5 bn was generated by basic development programmes, SIT 8.25 involved taking over Slovenian Railways' debt and SIT 19.95 bn represented the debt position of one-month treasury bills. The increase in the debt of direct state budget users totalling SIT 28.1 bn resulted from value changes. Due to the partial early settlement of liabilities arising from RS15 and RS04 bonds out of NLB proceeds, the debt decreased by SIT 28.4 bn. Until the end of 2001, the debt structure dynamics were mainly linked to the relative smallness of the Slovenian financial market and the process of assuming former Yugoslavia's debt. Since 2001, the Republic of Slovenia has not borrowed in foreign financial markets. For this reason, the internal debt of direct state budget users has been growing since 2001 and represented 61.2% of the total debt on 31 December 2003 (49.8% in 2000). Despite the relatively rapid growth of short-term debt seen in the past, direct state budget users have mainly incurred long-term debt which accounted for 94.8% of the total RS' debt at the end of 2003. 2003 also saw a continuation of the established trends in the debt structure in terms of debt instruments. The share of loans in debt thus fell in 2003 while the share of instruments involving a fixed interest rate that will in the long run ensure lower financing costs increased. The share of tolar debt, which has been rising since 2001, increased further to reach 48.3% of the total debt at the end of 2003. On the other hand, the share of debt in US dollars has been on a rapid decrease since 2000 and amounted to just 1.2% of the total debt at the end of 2003. Debt denominated in euros represented 50.0% of total debt at the end of 2003. The debt of state funds and other central government units totalled SIT 159.6 bn (2.8% of GDP) at the end of 2003. The biggest shares in state funds' debt were taken by the Environmental Protection Development Fund (75.4% of total state fund debt) and Public Regional Development Fund (24.6% of total state fund debt). Among other central government units, the Slovenian Compensation Company generated 89% of the total debt. Local government debt and debt of the Pension and Disability Insurance Institute (PDII) and the Health Insurance Institute (HII) rose by a total of 0.1% of GDP in 2003. Due to restrictive legal restrictions, the indebtedness of local governments has been low for several years and composed of just internal debt. At the end of2003, local government debt amounted to SIT 18.4 bn (0.3% of GDP). The PDII and the HII only borrow in the domestic financial market, taking out short-term loans and liquidity loans within the Treasury Single Account system. At the end of 2003, the debt of the PDII and HII totalled SIT 40.1 bn or 0.7% of GDP. Slovenia's level of indebtedness is one of the lowest in the EU in terms of debt and interest payments relative to GDP. The only countries that were less indebted than Slovenia were Luxembourg, Estonia, Latvia and Lithuania. In addition, Slovenia has continuously fulfilled the Maastricht convergence criterion concerning the general government debt position. 1 General government debt (burdening the budget financing costs) includes central government debt, local government debt and the debt of social insurance funds (Pension and Disability Insurance Institute and Health Insurance Institute). Central government debt according to the Standard Classification of Institutional Sectors (SKIS) comprises the debt of direct state budget users, state funds and other central government units. IMAD Development Report 2005 97 Analytical Appendix - Indicators Table: General government debt in 2000-2003, SIT bn and as a % of GDP 2000 2001 2002 2003 Debt of direct state budget users 1,013.4 1,227.1 1,404.8 1,467.3 as a % of GDP 23.8 25.8 26.4 25.5 Securities 839.0 1,000.6 1,195.3 1,295.0 as a % of GDP 19.7 21.0 22.5 22.5 Loans 174.4 226.5 209.5 172.3 as a % of GDP 4.1 4.8 3.9 3.0 Debt of state funds 6.8 13.9 15.3 18.2 as a % of GDP 0.2 0.3 0.3 0.3 Securities 2.6 4.6 4.4 4.1 as a % of GDP 0.1 0.1 0.1 0.1 Loans 4.1 9.2 10.8 14.1 as a % of GDP 0.1 0.2 0.2 0.2 Debt of other central government units 41.4 66.8 103.0 141.4 as a % of GDP 1.0 1.4 1.9 2.5 Securities 40.9 66.4 102.2 128.4 as a % of GDP 1.0 1.4 1.9 2.2 Loans 0.5 0.4 0.8 13.0 as a % of GDP 0.0 0.0 0.0 0.2 Assets on accounts 0.8 1.0 1.4 1.9 CENTRAL GOVERNMENT DEBT 1,062.3 1,308.7 1,524.5 1,628.8 as a % of GDP 25.0 27.5 28.7 28.3 LOCAL GOVERNMENT DEBT 7.3 8.1 14.3 18.4 as a % of GDP 0.2 0.2 0.3 0.3 Securities 0 0 0 0 as a % of GDP 0.0 0.0 0.0 0.0 Loans 7.3 8.1 14.3 18.4 as a % of GDP 0.17 0.17 0.27 0.32 DEBT OF SOCIAL INSURANCE FUNDS 23.2 22.8 30.5 40.1 as a % of GDP 0.5 0.5 0.6 0.7 Securities 0 0 0 0 as a % of GDP 0.0 0.0 0.0 0.0 Loans 23.2 22.8 30.5 40.1 as a % of GDP 0.5 0.5 0.6 0.7 GENERAL GOVERNMENT DEBT 1,092.9 1,339.6 1,569.3 1,687.2 as a % of GDP 25.7 28.1 29.5 29.4 Source: Ministry of Finance. Figure: General government debt in Slovenia and EU member states in 2003, as a % of GDP Source: Ministry of Finance, Eurostat. IMAD Development Report 2005 98 Analytical Appendix - Indicators Balance of payments In 1997, the current account that had been balanced until then turned into a deficit which peaked in 1999; thereafter it began to narrow subsequently and returned to a surplus in 2001 and 2002. In 1995-1997 the current account was balanced. The trade deficit totalled 4.3% of GDP, however, the surplus in trade in services (3.1% of GDP) and positive net factor incomes and current transfers enabled the current account to achieve a balance. In 1998-2000 the current account deficit averaged out at 2.2% of GDP (the trade deficit totalled 5.2% and the services deficit came in at 2.1%). The current account began to record a deficit in 1998 when Slovenia's real export growth slowed down under the indirect impact of the financial crises in Asia and Russia. At the same time, strong domestic investment encouraged high import growth. In 1999, the growth of goods exports slowed down strongly (due to the stagnant exports to the countries of former Yugoslavia, the sharp fall in exports to Russia and the relatively modest increase in exports to the EU), while imports of goods surged (as a result of high domestic spending prior to introducing VAT). As a result, the trade deficit reached 5.8% of GDP that year. 1999 also recorded a fall in the surplus in trade in services due to the smaller net foreign exchange receipts from tourism (the Kosovo crisis), net imports of construction services and faster import growth of other (non-traditional) services. The current account deficit thus reached 3.3% of GDP, the biggest share in the observed period. In 2000, export growth was boosted by favourable international economic conditions (strong foreign demand), while the relatively modest imports growth was chiefly due to the sluggish domestic demand. The surplus in trade in services widened significantly (from 1.6% of GDP in 1999 to 2.4% of GDP), which helped the current account deficit to narrow to 2.8% of GDP. In 2001, the real export growth of goods and services (6.3%) decelerated by more than half compared to 2000 (13%) as a result of the softening seen in the economic activity in the EU countries. On the other hand, the increased sales of goods in the markets of former Yugoslavia and Russia prevented an even bigger drop in the real growth rate of exports. The modest real growth of goods and services imports was linked to weak domestic demand. With the further narrowing of the trade deficit (to 3.1% of GDP) and the sustained level of surplus in services (2.4% of GDP), factor incomes and current transfers, the current account turned into a surplus of 0.2% of GDP in 2001. In 2002, the current account surplus increased significantly, to 1.4%. This rise was underpinned by modest imports (small increase in domestic demand) on the one hand, and sustained exports growth at the 2001 level along with improved terms of trade (by 2 p.p.) on the other. The trade deficit narrowed from 3.1% of GDP to 1.1% of GDP. Trade in services picked up considerably from the previous year and resulted in a slight increase in the surplus in services (to 2.6% of GDP). In 2003, the current account surplus turned into a slight deficit (-0.4% of GDP) which was, along with slightly improved terms of trade, due to the modest growth of exports and the increase in imports on the back of the accelerated growth of domestic demand. Against the background of the less favourable economic situation in EU countries, the growth of goods exports slowed down noticeably in 2003. As export revenues in EU markets rose only modestly, Slovenian exporters increased their exports to the CEFTA markets, non-European countries and the Russian Federation. As a result, the real growth of goods exports reached 4.4% (6.5% in 2002). The rapid increase in domestic spending seen in 2003 gave rise to the stronger growth of imports that came in at 7.3% in real terms (4.4% in 2002), pushing the trade deficit up to 2.2% of GDP (the terms of merchandise trade improved by 0.5 p.p.). The volume of trade in services rose more slowly than that of the trade in goods in 2003, while exports of the three main groups of services (transport, travel and other services) grew at a slower pace than their imports. The surplus in services trade was lower than in 2002 (2.2% of GDP) even though the terms of trade in services improved thanks to the higher export prices of transport, restaurant and hotel services. The deficit in factor incomes widened compared to 2002, largely due to the higher reinvested earnings by foreign investors and higher interest rates on foreign loans. The positive current transfers balance decreased by a third compared to the previous year: transfers from abroad fell in both government and other sectors, while other sectors' transfers abroad increased (insurance and other transfers). In the first eleven months of2004, the current account surplus retained almost the same level as in the same period of2003, while the flows ofgoods and services strengthened considerably. Exports of goods and services expressed in euros were up 10.6% in nominal terms (10.2% in goods and 12.3% in services), while imports of goods and services rose by 11.2% in nominal terms (11.6% in goods and IMAD Development Report 2005 99 Analytical Appendix - Indicators 9.1% in services). As expected, merchandise exports accelerated within the EU-25 market: the highest rise in Slovenia's main trading partners was recorded in exports to Austria and France, while the upturn was more modest in Germany and Italy. The level of exports to 'non-traditional' trading partners (Belgium, Spain, Greece, Denmark) also rose sharply. Exports of goods to the countries of former Yugoslavia increased above expectations, notably in April prior to Slovenia's accession to the EU and prior to the expiry of the free-trade agreements with these countries, which was followed by an increase in the customs duties on imported Slovenian goods. Similarly, exports to Russia surged as the high oil prices and the consequent strong growth of the Russian economy boosted the country's imports demand. On the import side, consumer and intermediate goods were up most markedly as a result of the stronger growth of private consumption and the increase in the volume of industrial production. Of all end-use product groups, investment goods recorded the smallest rise in imports. The growth of services exports strengthened as well, mainly on the back of the strong increase in transport and other services (especially communication, construction, IT and other business services). In services imports, the highest rise was recorded in the imports of transport services, which was in line with the rise in goods imports. In the first eleven months of2004, the balance of goods and services registered a surplus of EUR 45.7 m, which was nevertheless more than 50% lower than in the comparable period of 2003 due to the increasing goods deficit (EUR 579.8 m) and in spite of the higher services surplus (EUR 625.5 m). The smaller deficit in the balance of factor incomes was largely the result of lower estimates of the reinvested profits of foreign investors than in the same period of 2003. The surplus in the balance of current transfers remained at approximately the same level as in the same period the year before. Within their structure, net inflows from the EU budget and net outflows of other sectors (workers' remittances and other transfers) enjoyed the highest increase. The current account balance recorded a surplus of EUR 30.8 m in the first eleven months of 2004. Table: Current account of the balance of payments in Slovenia (as a % of GDP) and real growth rates of trade in goods and services (in %), 1995-2003 1995 1996 1997 1998 1999 2000 2001 2002 2003 Current account, % of GDP -0.3 0.2 0.3 -0.6 -3.3 -2.8 0.2 1.4 -0.4 Trade balance -4.7 -4.2 -4.0 -3.8 -5.8 -5.9 -3.1 -1.1 -2.2 Services balance 2.9 3.2 3.3 2.4 1.6 2.4 2.4 2.6 2.2 Real growth rates of trade in goods and services, in % Exports of goods 3.0 2.4 13.1 9.4 2.7 12.9 7.0 6.5 4.4 Exports of services -6.3 4.4 3.8 -1.9 -3.7 13.6 3.1 7.9 -2.4 Imports of goods 13.1 2.1 13.0 10.8 8.6 7.7 3.2 4.4 7.3 Imports of services -1.2 3.5 1.9 6.5 4.2 6.9 1.9 8.1 3.3 Sources: SORS, BS, calculations by IMAD. Figure: Current account balance in Slovenia and some new EU member states in 1995-2003, as a % of GDP Sources: SORS, BS, OECD Economic Outlook, December 2004. IMAD Development Report 2005 100 Analytical Appendix - Indicators Gross external debt After rising relatively modestly in the first half of the 1990s, external debt started to accelerate in 1995primarily due to the private sector's increased borrowing. In 19952002, non-guaranteed private debt rosefaster than public and publicly-guaranteed debt. Non-guaranteed private debt increased by an average annual rate of 15.6% in the 19952002 period, slightly faster than public and publicly-guaranteed debt (14.9%). From end-1995 to end-2002, non-guaranteed public debt rose from EUR 3,097 m to EUR 8,254 m, while public and publicly-guaranteed debt increased from EUR 1,178 m to EUR 3,201 m. The bulk of non-guaranteed private debt was made up of loans to other sectors (non-financial corporate sector in particular)1, while the government sector mainly borrowed by issuing Eurobonds. Public and publicly-guaranteed debt increased further when Slovenia assumed 18% of former Yugoslavia's non-allocated debt in accordance with the New Financial Agreement (NFA) of 1996 and 16.39% of Yugoslavia's non-allocated debt following bilateral negotiations with individual countries of the Paris Club. Total debt assumed from former Yugoslavia amounted to EUR 523 m, which represented 15.6% of the total public and publicly-guaranteed debt at the end of October 2003. In 2003, gross external debt mainly rose on account of the borrowing of domestic commercial banks. Slovenia's total gross external debt increased by EUR 1,850 m in 2003 to total EUR 13,305 m at the end of2003. Current transactions pushed gross external debt up by EUR 1,934 m, while exchange rate differences (euro's appreciation against the basket of currencies) reduced it by EUR 84 m. Loans to the banking sector (EUR 1,010 m) and to other sectors (EUR 648 m) accounted for 89.6% of the rise in the gross external debt; the external borrowing of these sectors was encouraged by the tolar's slow depreciation against the euro and the difference between domestic and foreign interest rates. In 2003 over 2002, the smallest increase in indebtedness among the analysed sectors was seen in the government sector (EUR 74 m). The borrowing of affiliated enterprises - legal entities affiliated to non-residents through equity capital, owning 10% or more - rose by EUR 118 m year on year. The largest part of this increase (83.4%) was generated by debt owed to investors, the rest came from affiliated enterprises. The increase in the position of Slovenia's gross external debt in the first three quarters of 2004 was largely fuelled by commercial banks' increased borrowing abroad; enterprises, on the other hand, borrowed less than the previous year, while the government sector further reduced its indebtedness. From end-2003 to end-September 2004, Slovenia's gross external debt rose by EUR 1,520 m to EUR 14,825 m. Like in the previous year, this rise predominantly resulted from commercial banks' borrowing to meet the increased domestic demand for foreign exchange loans, while corporate borrowing abroad was in decline for the second year in a row. As a result of the relatively uniform domestic and foreign interest rates on foreign exchange loans, enterprises took out foreign currency loans in the domestic market more extensively. The government sector repaid more foreign loans than it took out in the observed period. The repayment of matured Eurobonds of the Republic of Slovenia issued in 1997, totalling EUR 204.5 m, represented the bulk of government loan repayments. Compared to end-2003, there was a higher share of commercial banks (up 4.6 percentage points to 30.2%) in the structure of external debt, and a lower share of the government sector (down from 18.9% to 15.8%) and other sectors - including enterprises - (from 47.1% to 46%), while the share of affiliated enterprises shrank only slightly (from 8.4% to 7.6%). 1 Other sectors include non-bank financial corporations, non-financial corporations and households, and non-profit institutions serving households. IMAD Development Report 2005 101 Analytical Appendix - Indicators Net external debt also increased in the first three quarters of2004. Net external debt, defined in the new IMF standards as the difference between liabilities (gross external debt) and debt-instrument claims, totalled EUR 1,089 m at the end of September 2004 (EUR 456 m at the end of December 2003). The government sector recorded net external liabilities amounting to EUR 2,337 m (EUR 2,505 m at the end of December 2003), mostly in the form of issued bonds and debentures. The Bank of Slovenia manages international reserves on behalf and on account of the government and recorded net external claims totalling EUR 6,613 m (EUR 6,860 m at the end of December 2003). Commercial banks recorded net external liabilities of EUR 2,451 m in the first three quarters, or EUR 828 m more than at the end of 2003. Other sectors registered net liabilities of EUR 3,131 m (EUR 3,226 m at the end of December 2003), while affiliated enterprises had net external claims totalling EUR 218 m at the end of September 2004 (EUR 38 m in December 2003). Dynamic indicators ofexternal indebtedness have deterioratedfor the second consecutive year. Nevertheless, international monetary reserves and total foreign exchange reserves still suffice to cover short-term debt by the remaining maturity, which is important in view of the economy's liquidity and solvency. However, gross external assets in debt instruments no longer cover gross external liabilities (gross external debt), which reflects Slovenia's net debt position (see Table 1). Table 1: Dynamic debt indicators, position at year-end, EUR m 1999 2000 2001 2002 2003 30 Sep.2004 A. Short-term debt by remaining maturity1 3,374 4,382 4,569 4,448 4,555 5,182 B. International monetary reserves of the BS 3,159 3,436 4,984 6,781 6,879 6,547 C. Foreign exchange 4,104 4,705 6,513 7,842 7,703 7,382 D. Gross external claims in debt instruments2 7,697 8,700 10,825 12,580 12,848 13,736 E. Gross external liabilities in debt instruments3 8,012 9,490 10,403 11,455 13,305 14,825 Debt indicators - international reserves to short-term debt (B/A) 0.94 0.78 1.09 1.52 1.51 1.26 - foreign exchange to short-term debt (C/A) 1.22 1.07 1.43 1.76 1.69 1.42 gross external claims in debt instruments/gross external debt (D/E) 0.96 0.92 1.04 1.10 0.97 0.93 Source: Bank of Slovenia. Notes: 'Short-term debt by remaining maturity includes short-term debt and part of long-term debt falling due within one year. 2Gross external claims in debt instruments include all claims in Slovenia's balance of assets, except equity. 3Gross external liabilities in debt instruments include all debt liabilities in Slovenia's balance of assets (gross external debt). Table 2: Slovenia's gross external debt position by maturity and by liabilities to affiliated entities, EUR m 1995 1996 1997 1998 1999 2000 2001 2002 2003 30 Sep. 2004 Total gross external debt 4,275 5,381 6,165 6,459 8,012 9,490 10,403 11,455 13,305 14,825 Short-term debt 1,470 1,503 1,819 1,838 2,155 2,283 2,223 2,305 2,447 2,579 Public and publicly-guaranteed debt 0 0 0 0 0 0 15 66 40 33 Private non-guaranteed debt 1,470 1,503 1,819 1,838 2,155 2,283 2,208 2,239 2,407 2,546 Long-term debt 2,083 2,968 3,347 3,726 4,811 5,895 7,348 8,147 9,737 11,084 Public and publicly-guaranteed debt 1,178 1,657 1,875 2,007 2,462 2,883 3,107 3,135 3,525 3,706 Private non-guaranteed debt 905 1,311 1,472 1,719 2,350 3,012 4,241 5,012 6,212 7,378 Liabilities to affiliated entities 722 910 999 895 1,045 1,312 832 1,002 1,120 1,162 Public and publicly-guaranteed debt 0 0 0 0 0 0 0 0 0 0 Private non-guaranteed debt 722 910 999 895 1,045 1,312 832 1,002 1,120 1,162 Source: Bank of Slovenia. IMAD Development Report 2005 102 Analytical Appendix - Indicators Country risk The first assessment of Slovenia's country risk was made by the agencies Moody's, Standard & Poor's and Fitch Ratings in 1996 when Slovenia was given the highest initial ratings among Central and Eastern European countries. The relatively high initial ratings of Slovenia's country risk1 given by all agencies were due to the favourable assessments in all three components of country risk (political, social and economic). The initial high rating remained unchanged for several years despite the undermined general government balance in 1997 and external balance in 1999 because these two indicators nevertheless remained within sustainable limits. In the following years, all three agencies revised their initial ratings upwards, to a large extent due to Slovenia's successful accession negotiations and entry to the EU. Moody's assessment was first revised upwards in 2000 (from A3 to A2) which was, despite the substantial deficit widening in the current account of the balance of payments seen in 1999 and 2000, primarily due to the enforcement of the EU Association Agreement of 1999. The successfully concluded negotiations with the EU were also the reason for Moody's upward revision (to Aa3) in November 2002, when the outlook for the future was again assessed as stable. As a result of this improvement in its rating, Slovenia was ranked among the countries with a low-risk assessment (high quality) according to Moody's classification. Since Slovenia's entry to the EU in May 2004, Moody's assessment has remained unchanged. However, in a special report released in July 2004 the agency pointed out that the key criteria for assessing country risk in all new member states in the future would be, in particular, an efficient mix of economic policies during participation in ERM II, a further deepening of the financial market and a sustainable medium-term fiscal position where pressure on general government expenditure caused by additional financial burdens (co-financing the additional inflow of funds from the European budget, setting up the Schengen border) after accession is indicated as the main risk. The agency also drew attention to the need to carry on with the unfinished structural reforms. Standard & Poor s high initial country risk assessment (A) was revised upwards to A+ when the Treaty of Accession between Slovenia and the EU was signed in May 2003. Following accession to the EU in May 2004 it was raised further to AA-. Standard & Poor's similarly emphasised that the implementation of structural reforms (labour market reform, privatisation of the energy sector, development of the financial sector) is of paramount importance for improving the country's rating. The assessments of Fitch Ratings have seen three upward revisions: in December 1999 (from A- to A), in May 2003 (from A to A+) and in July 2004 (from A+ to AA-). Slovenia enjoys the highest country risk rating of the new EU member states while, among the old members, only Greece's rating was lower than Slovenia's in 2004. Ever since the upward revision of November 2002, Moody's has given Slovenia the highest country risk rating of the new EU member states.It is also higher than the rating of Greece that was lowered from Aaa (the highest rating) to A1 in autumn 2004 due to Greece having reported false figures for the country's budget deficit from 2000 on. With the exception of Greece, Belgium (Aa1), Italy and Portugal (both Aa2), Moody's gave all euro area countries and the remaining three 'old' EU members the highest rating (Aaa). Standard & Poor's also ranked Slovenia highest among the new member states and higher than Greece whose future outlook assessment was revised from stable to negative in September 2004. All 'old' EU members were assessed better that Slovenia (Italy and Portugal with AA-, Belgium and Spain with AA+, and others with AAA). Also Fitch Ratings' rating for Slovenia was the highest among the new EU members IMAD Development Report 2005 103 Analytical Appendix - Indicators and higher than Greece's, while all other countries received better ratings (AA for Belgium, Italy and Portugal and AAA for the rest). Table 1: Initial and latest available country risk assessment for Slovenia (long-term foreign currency rating) made by Standard & Poor's, Moody's Investors Service and Fitch Ratings Standard&Poofs Moody's Investors Service FitchRatings 8 May 1996 A 8 May 1996 A3 8 May 1996 A- 13 May 2004 AA- 26 November 2004 Aa3 7 December 2004 AA- Source: Standard & Poor's, Moody's Investors Service, FitchRatings. Table 2: Initial and latest available assessments of country risk and outlooks for the future1 made by Moody's, Standard & Poor's and Fitch Ratings for Slovenia, other new EU member states, Greece and Portugal Initial assessment Latest assessment Standard&Poors Standard&Poors (13 May 2004) Moody's (26 November 2004) FitchRatings (7 December 2004) Slovenia A/Stable/ May 96 A+/Stable/ Aa3/Stable/ AA-/Positive/ Cyprus AA-/Stable/ August 91 A/Stable/ A2/Stable/ A+/Positive/ Czech Republic BBB/Positive/ July 93 A-/Stable/ A1/Stable/ A-/Stable/ Estonia BBB+/Stable/ December 97 A-/Stable/ A1/Stable/ A/Positive/ Latvia BBB/Stable/ January 97 A-/Stable/ A2/Stable/ A-/Positive/ Lithuania BBB-/Stable/ June 97 A-/Stable/ A3/Positive/ A-/Positive/ Hungary BB+/Positive/ April 92 A-/Stable/ A1/Stable/ A-/Negative/ Malta A/Stable/ March 94 A/Stable/ A3/Stable/ A/Positive/ Poland BB/Positive/ June 95 BBB+/Stable/ A2/Stable/ BBB+/Stable/ Slovakia BB-/Stable/ February 94 BBB+/Positive/ A3/Stable/ A/Stable/ Greece BBB/-/ September 88 A+/Negative/ A1/Stable/ A+/Negative/ Portugal A/-/ October 88 AA/Negative/ Aa2/Stable/ AA/Stable/ Sources: Standard & Poor's, Moody's Investors Service, FitchRatings. Note: 'outlook for the future, i.e. an assessment of further economic, social and political development is given in the descriptive form: Positive, Stable and Negative. 1 This analysis focuses on the country risk assessment for the issuing of long-term government bonds denominated in a foreign currency, which is important for estimating the risk premium in issuing long-term government securities. Knowledge-based society IMAD 106 Development Report 2005 Analytical Appendix - Indicators Total public expenditure on education Total public expenditure on education expressed as a share of GDP serves as a structural indicator measuring the level of investment in education, which is one ofthe main factors ofknowledge-based societies' development. In European countries, the share of total public expenditure in total expenditure on education ranges between 85% and 95% (91% in Slovenia in 2002). In international comparisons the total share of public expenditure on education in GDP is used as the main indicator due to the lower reliability of figures on private expenditure on education. This year this indicator has been included in the Development Report for the first time. The data for Slovenia, published at the end of 2004 by the SORS, were collected according to an internationally comparable methodology1 for the first time. It should be noted, however, that the indicator's values differ across countries with regard to the organisation of their education and training systems, education financing systems, their inclusion of youth and adults in education and the demographic structure of the population. The share of total public expenditure on education in Slovenian GDP totalled 6.02°% in 2002, which is significantly above the EU-25 average. Compared with the previous year, the GDP share of total public expenditure on education fell by 0.11 p.p. in 2002, while provisional data for 2003 indicate a slight increase to 6.09%. This figure places Slovenia above the level achieved by most European countries (between 4% and 6% of GDP) and well above the EU-25 average (5.37% in 2001; see table). Individual countries' shares of total public expenditure on education have not changed significantly over these years; however, in general a falling trend was observed in the 1995-2000 period while the shares have begun to increase again after 2000, which is in line with the Lisbon Strategy objectives. The relatively high share of Slovenia's total public expenditure on education is nevertheless lower than the shares achieved by some Northern European countries, notably Denmark, Sweden and Finland which are also in the lead according to some other education indicators - share of the population completing tertiary education, writing skills and the inclusion of adults in education - where Slovenia still lags behind significantly. Slovenia also exceeds the EU-25 average by the share of its total public expenditure on tertiary education in GDP. According to the SORS' first estimate, the share of total public expenditure on tertiary education edged up slightly further in 2003, from 1.33% in 2001 to 1.36%. This increase is in line with the SEDS guidelines. The share of total public expenditure on primary education recorded an even higher increase (from 2.51% in 2001 to 2.69% in 2003), largely due to increased investment linked to the launching of the nine-year primary school. Total public expenditure on education shrank primarily in secondary education (from 1.69% of GDP in 2001 to 1.48% in 2003) and slightly in pre-school education (from 0.59% to 0.56%)2. If we compare Slovenia's total public expenditure by levels of education with other European countries, we can see that already in 2001 Slovenia's share of total public expenditure on education in GDP allocated for tertiary education was above the EU-25 average (1.24%) and just a fraction below the EU-15 average (1.36%). Among the new EU member states, only Lithuania spends roughly the same share of GDP as Slovenia on tertiary education (see figure). The GDP share of total public expenditure for all lower-than-tertiary education levels together totalled 4.73% in 2003 (4.80% in 2001), which is more than the 2001 averages of the EU-15 (4.16%) and EU-25 (4.19%). Also in these expenditures, Denmark and Sweden had the highest shares in GDP (5.8% and 5.3%, respectively). 1 Data on education are acquired by the UOE questionnaire common to three international organisations: UNESCO, OECD and Eurostat. The questionnaire consists of a non-financial and a financial part. Slovenia has reported the non-financial data since the school year 1996/97, while data for the financial part for the 2001-2003 period have been prepared this year for the first time. Data in the UOE questionnaire cover formal education only. 2 Figures for 2003 are provisional estimates. IMAD Development Report 2005 107 Analytical Appendix - Indicators Table: Public expenditure on education1 in Slovenia, other EU member states and some OECD countries, as a % of GDP 1995 1996 1997 1998 1999 2000 2001 20023 Slovenia - - - - - - 6.13 6.02 EU 252 5.36 5.31 5.29 5.43 5.33 5.22 5.37 5.60 EU 152 5.42 5.53 5.40 5.57 5.45 5.40 5.42 5.64 Austria 6.04 5.9 5.8 5.77 5.8 5.66 5.7 Belgium 6.11 Danmark 7.67 8.09 7.94 8.32 8.14 8.39 8.50 8.51 Finland 6.85 7 6.52 6.29 6.31 6.12 6.24 6.39 France 6.04 6.01 6.03 5.95 5.93 5.83 5.76 5.81 Greece 2.87 3.07 3.44 3.47 3.64 3.79 3.9 3.96 Irland 5.07 5.33 5.15 4.87 4.57 4.36 4.35 Italy 4.85 4.85 4.53 4.7 4.79 4.57 4.98 4.75 Luxembourg 4.26 4.00 4.11 3.84 3.99 Germany 4.62 4.63 4.58 4.53 4.57 Netherland 5.06 4.99 4.75 4.8 4.77 4.87 4.99 5.08 Portugal 5.37 5.54 5.60 5.62 5.74 5.74 5.91 5.83 Spain 4.66 4.68 4.54 4.49 4.5 4.42 4.41 4.44 Sweden 7.22 7.37 7.62 7.71 7.47 7.39 7.31 7.66 U.K. 5.24 5.06 4.88 4.79 4.58 4.58 4.69 Lithuania 5.08 5.14 5.42 5.96 6.14 5.67 5.92 5.89 Latvia 6.27 5.29 5.19 6.29 5.78 5.43 5.75 5.82 Estonia 5.83 6 5.91 5.66 6.13 5.59 5.48 Cyprus 4.81 5.01 5.66 5.77 5.65 5.60 6.28 6.83 Czech Republic 4.62 4.48 4.43 3.93 4.05 4.04 4.16 4.41 Hungary 5.37 4.48 4.61 4.56 4.66 4.54 5.15 5.39 Poland 5.14 4.73 4.84 5.09 4.88 4.99 5.56 5.41 Slovakia 4.98 4.5 4.8 4.51 4.4 4.15 4.03 Malta 4.77 4.55 4.47 4.54 Norway 7.4 6.7 7.0 U.S.A. 5.0 5.6 Sources: Eurostat for EU countries, SORS for Slovenia, OECD for Norway and USA, IMAD's calculation for the EU 15 and EU 25 aggregates. Notes: 1According to the UOE methodology public expenditure on education comprises total budgetary expenditure on the formal education of youth and adults at national and municipal levels. Public direct expenditure on education institutions (both instructional and non-instructional) is covered, as are transfers and payments to households and other private entities. Calculations of averages for EU 15 and EU 25 include countries for which annual data are given in the table. 3Data for 2002 are provisional for all countries. Figure: Total public expenditure on tertiary education in Slovenia, other EU member states and some OECD countries, as a % of GDP in 2001 3.0 2.5 2.0 -1.5 -1.0 0.5 0.0 2.7 2.1 2.1 19- 1.5 1_3 l^ I2 i2 1.2 1.1 1.11.1 1.1 1.1 1.1 1 4 1 4 H H . ■_ inn»131.31.3121.21.2 1 BW1 1 MM IB t-sSwIiialSJ CD CD en ra F O =3 I Ü O 1.01.01.0 0.9 r-n 0.8 0.8 0.8 0. 5 Sources: SORS Note: According , Eurostat, OECD. to the ISCED, tertiary education comprises levels 5 and 6; the expenditure on R&D in tertiary education is included. IMAD Development Report 2005 108 Analytical Appendix - Indicators Average number of schooling years of people in employment According to provisional data for 20041, the average number of schooling years of people in employment in Slovenia continued to rise, albeit at a slower pace than in the previous two years. In 2004, people in employment completed an average 11.7 years of schooling according to the labour force survey and 11.5 years of schooling according to the SORS' employment statistical register, respectively 0.05 and 0.04 more than in 2003. In contrast to 2003, when the education levels of employed people rose in all groups of activities, 2004 only saw a rise in mining and quarrying, financial intermediation, education and other community, social and personal services. Education levels fell in agriculture and fishing and in those employed in private households, while it remained at approximately the same level as in the previous year in all other activities. The highest average number of schooling years was again recorded in education, public administration and financial intermediation (see table). The share of people in employment with a higher education has been growing relatively fast, notably in public services, financial intermediation and electricity, gas and water supply. In the past four years, (according to the statistical employment register), it rose by an average of 0.7 p.p. per year to reach 20.7% in 2004, which is 5.8 p.p. more than in 1995 and 2.9 p.p. more than in 2000. Generally, the highest and most rapidly rising shares of employed people with a higher education are observed in those activities which also have the highest number of school years. In the 1995-2004 period, the share of highly educated workers rose fastest in education, public administration and financial intermediation (between 10.1 p.p. and 10.5 p.p. during the whole period), where the shares were also the highest (59.6%, 44.9% and 37.3%, respectively). The share of employees with a higher education also increased considerably in electricity, gas and water supply (by 9.5 p.p. to 21.1%), and in 2000-2004 also in health and social work where 34.4% of employees were highly educated in September 2004. A similar share (around 30%) was seen in the groups real estate, renting and business services, and other community, social and personal services.<0} In all other industries of a predominantly manufacturing character, there were less than 12% workers with a higher education, the lowest share being observed in the groups construction and hotels and restaurants (about 5%) Persons in employment with a completed higher education continue to work mainly in education, the public administration and high value added services, while their concentration in industrial activities remained unchanged in 2004. Most of the highly educated workforce is employed in education, accounting for 21.9% of the total number of people in employment with a higher education. The education activity is followed by the manufacturing industries (14.9%), the public administration (14.1%), business activities (12.9%), health and social work (9.8%) and wholesale and retail trade (7.9%). 1 Figures from the labour force survey for Q2 of 2004 and the statistical employment register for September 2004. IMAD Development Report 2005 109 Analytical Appendix - Indicators Table: Average number of schooling years of persons in employment in Slovenia in 1995-2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 People in employment according to the labour force survey 11.0 11.1 11.0 11.2 11.3 11.4 11.4 11.5 11.6 11.7 People in employment according to the SORS register 11.0 11.0 11.1 11.1 11.2 11.2 11.3 11.4 11.5 11.5 A Agriculture, forestry, hunting 10.3 10.5 10.5 10.6 10.7 10.7 10.6 10.4 10.5 10.4 B Fishing 10.1 10.2 10.4 10.4 10.5 10.4 10.5 10.6 10.7 10.4 C Mining and quarrying 10.3 10.3 10.4 10.4 10.5 10.6 10.6 10.7 10.9 11.0 D Manufacturing 10.1 10.1 10.2 10.2 10.3 10.3 10.3 10.4 10.5 10.5 E Electricity, gas and water supply 11.2 11.3 11.4 11.5 11.5 11.6 11.6 11.6 11.7 11.7 F Construction 10.2 10.1 10.0 10.0 9.9 9.9 9.9 9.9 10.0 9.9 G Wholesale and retail trade; repair of motor vehicles 11.2 11.2 11.3 11.3 11.3 11.4 11.4 11.4 11.5 11.5 H Hotels and restaurants 10.2 10.2 10.3 10.3 10.3 10.4 10.4 10.4 10.4 10.5 I Transport, storage and communications 10.9 11.0 11.0 11.0 11.0 11.1 11.1 11.2 11.2 11.3 J Financial intermediation 12.6 12.7 12.8 12.7 12.8 12.9 12.9 13.0 13.1 13.2 K Real estate, renting & business activities 12.0 12.0 12.0 12.0 12.1 12.1 12.2 12.2 12.3 12.3 L Public administration, defence and social insurance 12.9 12.9 13.0 13.2 13.1 13.2 13.3 13.4 13.4 13.4 M Education 12.9 13.0 13.1 13.2 13.2 13.4 13.4 13.6 13.7 13.8 N Health and social work 11.9 11.9 11.9 11.8 11.8 11.8 11.9 12.5 12.5 12.5 O Other community, social and personal services 11.8 11.8 11.8 11.9 11.9 11.9 11.9 12.0 12.1 12.2 P Private households with employed persons 10.1 10.2 9.9 10.1 10.2 10.1 10.3 10.2 10.2 10.1 Source: SORS, calculations by IMAD. Figure: Share of employed people with a higher and post-graduate education by activities, September 2004 (in %) 60 50 40 30 20 10 0 Source: SORS, calculations by IMAD. □ Higher education ■ Master's degree, doctorate ■ mm - _ _ - - 1 1 ABCDEFGHI JKLMNOP IMAD Development Report 2005 110 Analytical Appendix - Indicators Share of the population with a completed secondary or higher education The population's education structure keeps improving as a result of the increased attainment of the secondary and tertiary levels of formal education. Those who have completed at least secondary education represented as much as 78.3% of the population aged 25-64 in 2003 according to the labour force survey (68.7% in 1995), and 75.9% according to the 2002 census (59.1% in 1991). The fastest increase was seen in the share of people who have finished a 4-5 year secondary school (general or technical programmes) and in the share of high education graduates. In 2002 (the latest data), 80.3% of the generation completed a secondary education (of which 27.2% were in vocational and 53.1% in technical and general secondary education programmes), while 8.6% of the generation passed an additional final examination in 3+2 programmes. In 1995, by comparison, 72.9% ofthe generation completed secondary schooling. Secondary programmes for adults were completed by 6,184 people in 2002, which is 3.4-times more than in 1995. 12,900 students graduated in 2002, while 500 fewer finished their studies the following year when there were no more graduates at the higher level (as opposed to the university level) in university programmes. In comparison with other countries, Slovenia has a relatively high share of its population with a completed secondary education, while it lags behind in its share of the population with a completed tertiary education. International comparisons are unreliable for methodological differences, especially as regards secondary education, while the comparisons of tertiary education produce better results. According to the share of the population aged 25-64 with a completed secondary education, Slovenia was the seventh among EU countries (the Czech Republic had the highest share: 76.5%, while Malta recorded the lowest percentage: 11.4%). In its share of the population with a tertiary education, Slovenia is still far behind the more developed and propulsive European countries although the gap narrowed somewhat in 2002 and 2003 with the increase in the number of graduates. Finland again recorded the highest share of the population having a tertiary education in 2003 (32.8%), while Malta was again the last among the current member states (9.0%). Slovenia occupied 16th place. Of the new member states, Estonia (30.4%), Cyprus and Lithuania had higher shares than Slovenia, while four of the old member states had lower shares (Austria, Luxembourg, Italy and Portugal). The inclusion of youth in education rose further in 2002/2003, while the inclusion of adults dropped slightly. In the school year 2002/2003, the number of students enrolled in secondary schools represented 76.8% of the total generation aged 15-19 (67.2% in 1994/95; Lisbon Strategy goal: 80%); enrolment is rising especially in grammar school, where it reached 28.4% of the generation aged 15-19 (compared to 19.8% in 1994/ 1995). In the reference generations1, the shares of students enrolled in secondary technical schools and vocational technical education have been rising, while enrolment in secondary vocational schools and lower vocational programmes has declined. The number of regular students also rose and accounted for as much as 37.4% of the generation aged 19-23 (23.6% in 1994-1995). The number of adults in formal secondary education, which had already exceeded 20,000 in 2000/2001 (8,460 in 1994), dropped slightly in the following year. It fell by almost 1,000 in general and technical schools, while rising in secondary vocational schools and in technical vocational programmes. The number of part-time students in university programmes also declined in 2003/2004, while their number in IMAD Development Report 2005 111 Analytical Appendix - Indicators vocational colleges is rising constantly. The total number of students (full-time and parttime) per 1000 people exceeded 50 already in 2002/2003. Table: Percentage of the population aged 25-64 with a completed secondary education in Slovenia in 1995-2003, in % According to the Labour Force Survey Census 1995 1996 1997 1998 1999 2000 2001 2002 2003 2002 Slovenia % of population with at least a secondary education 68.7 70.1 70.3 72.5 73.5 75.5 76.2 77.5 78.3 75.9 Secondary education 54.5 56.7 56.4 57.2 57.9 59.5 60.0 60.5 60.6 58.8 vocational 28.8 30.5 30.4 30.6 30.0 28.3 28.9 28.9 29.2 31.0 technical or general 25.7 26.3 26.1 26.7 28.0 31.2 31.1 31.5 31.4 27.8 Tertiary education 14.2 13.4 13.9 15.3 15.6 16.0 16.3 17.1 17.7 17.1 high-level vocational programmes 7.5 6.9 7.2 7.7 7.6 7.4 6.9 6.6 6.4 6.6 university 6.1 5.8 6.0 6.8 7.2 7.7 8.5 9.5 10.2 9.2 postgraduate studies 0.7 0.7 0.7 0.7 0.8 0.9 0.9 0.9 1.1 1.3 EU 25 % of population with at least a secondary education - - - - - 63.9 64.7 65.6 64.0 - Secondary education 44.5 45.1 45.7 44.2 Tertiary education 19.4 19.6 19.9 19.8 EU 15 % of population with at least a secondary education 52.2 54.9 56.5 30.2 59.8 60.9 61.9 62.8 60.6 - Secondary education 35.5 37.0 38.1 20.0 40.1 40.5 41.0 41.6 39.8 Tertiary education 16.6 17.8 18.4 10.2 19.8 20.4 20.8 21.2 20.8 Sources: SORS, Eurostat. Figure: Percentage of the population aged 25-64 with a completed secondary education in selected EU member states in 2003 (Q2) 90 80 70 60 50 40 30 20 10 0 Source: turostat. — — _ _ _ □ Secondary education i—i — □ Tertiary education — — — i—i — — — — — — — — — — Czech R. Estonia Slovakia Lithuania Germany U. Kingdom Latvia Poland Sweden Denmark SLOVENIA Austria Finland Hungary Luxembourg EU-25 Cyprus EU-15 France Ireland Belgium Greece >> .2 1 According to the legally defined enrolment age (e.g. 15-17 for secondary vocational schools, 15-18 for technical secondary schools and grammar schools etc.). IMAD Development Report 2005 112 Analytical Appendix - Indicators Internet use Frequent methodological changes concerning the estimates of Internet use indicators make their statistical monitoring demanding and impede trend analyses and crosscountry comparisons. In the past few years, assessments of the current level and dynamics in Internet use were based on data obtained through the project 'Internet Use in Slovenia (IUS)'. In 2004 the SORS launched a survey on the use of information and communication technologies in households and enterprises1 which serves as the data source for the IMAD's estimates for 2004 and beyond. These surveys will be conducted annually in future and will also serve as the basis for all official comparisons with other EU member states in the information society field. The adoption of the SORS' data does not enable a direct comparison with the data on Internet use for previous years based on the IUS2. A methodologically correct comparison with other member states will also not be possible until 2005 when Eurostat is set to release the complete official data for the EU-25. The SORS' data for 20043 indicate that 43% of Slovenian residents aged 16-744 used the Internet last year; there were, however, considerable differences between different education levels of users. The share of users who used the Internet in the past three months totalled 37%. The SORS' survey shows there are no major differences in Internet use with regard to gender (men 44.4%, women 42%), while there are significant differences with regard to the education level of users. In the population that has completed tertiary education aged 16-74, Internet penetration was 90%, in the population that has completed secondary education 44% and in the population with a lower education just about 20%. The SORS' one-year figures do not enable trend growth estimates of Internet use; together with the IUS data, however, we can infer that growth rates of Internet use are decreasing in Slovenia. According to indicative comparisons of the shares of individuals using the Internet regularly5, Slovenia is lagging behind both the EU-15 and the EU-25 averages. The SORS' data on the Internet usage of individuals in 2004 can be compared with estimates for the EU-15 and EU-25. While the share of regular Internet users in Slovenia totalled 33%, the average for the EU 15 was 42% of the population aged 16-74 and 39% for the EU-25 (Policy Indicators, 2005). These are Eurostat's indicative estimates, and the data are still being completed. Among the new member states, Slovenia was left behind only by Estonia while, among old members, Greece, Ireland, Italy and Portugal did worse than Slovenia. One possible reason for this gap in Internet use by individuals is the relatively low share of the population with a tertiary education in Slovenia compared with the EU-15 average, bearing in mind that highly educated people are the most frequent Internet users. 1 SORS, 2004. 2 The main difference between the IUS and the SORS' analyses is in the methodology applied (different surveying methods, different sample sizes and sample structures, different questionnaires). The SORS conducts its survey in line with the Eurostat's instructions and recommendations. 3 The survey was conducted in April 2004. 4 The IUS comprises the population aged 10-75. It should be noted here that while the SORS' survey is in line with the Eurostat's methodology according to which the population aged 16-74 is included in the survey, it thus disregards an important segment of the population aged 10-16 which intensively uses the Internet (IUS, 2004). This is why the SORS' data can be originally lower than the data obtained by the IUS methodology. 5 Weekly Internet usage within the population aged 16-74. 6 Figures released on 22 February 2005 were used. IMAD Development Report 2005 113 Analytical Appendix - Indicators According to the SORS, 47% of Slovenian households had access to the Internet in 2004, a figure exceeding both the EU-25 and EU-15 averages. A comparison with the IUS survey (40% of households had Internet access in December 2003) shows significant differences which is probably attributable to the fact that the SORS' survey also includes households that can access the Internet via mobile phone although they do not necessarily use this possibility. According to the latest data on structural indicators released by Eurostat6, the share of households with Internet access in Slovenia (47%) is bigger than the averages of the EU-15 (45%) and EU-25 (42%). Moreover, Slovenia by far exceeds the other new member states except Cyprus (see the figure). The relatively smaller number of individual Internet users in Slovenia and its higher share of households with access to the Internet indicate that fewer household members use the Internet in Slovenia than in the EU-15. Slovenia has achieved a solid starting point in household Internet access. To increase its share further, however, it needs to address several problems. The SORS' survey observes that the main factors preventing wider Internet access by households are excessive equipment and access costs and the fact that some households do not want to have the Internet. The last factor implies that there are not enough e-services available that would be useful to household users, while the first two indicate a need to further increase the price accessibility of Internet use, primarily by ensuring the conditions for greater competition in offering broadband Internet access (leasing broadband access capacities to niche operators on the same conditions as to the main provider). Also in its latest report the European Commission calls attention to the fact that the prices of leased lines in Slovenia are still too high (EC, 2004: 199-203). Broadband Internet access is also an important factor in the further expansion of ecommerce, where Slovenia's progress has been very slow. According to the eEurope Summary Report (2004) it is obvious that Slovenia is particularly weak in introducing ecommerce between enterprises, where it lags behind not only the EU-15 average but also some new member states (e.g. Czech Republic, Estonia, Poland), while it exceeds the EU-15 average and all new member states regarding Internet access by enterprises. Efficient implementation of the E-administration Action Plan until 2004 can speed up the launching of e-services and the dynamics of introducing e-commerce in Slovenia. The September 2004 report on its implementation (Action Plan, 2004) reveals that Slovenia is more successful in introducing e-services for the citizens, where it does better than most EU-15 countries, while it falls behind with regard to the available e-services for enterprises, notably in the areas of company registration and customs declarations. Figure: Household access to the Internet in Slovenia and EU-15 in 2004, in % 80 70 60 450 40 30 420 10 0 BO £ c 20 10 0 < "5 of § ] - S "> c .52 2 = ra £ J o J? 13 □ 0É CÛ Source: SORS, calculations by IMAD. IMAD Development Report 2005 124 Analytical Appendix - Indicators Unit labour costs In 2003, the Slovenian economy saw a continued slow improvement in the ratio of labour costs to GDP or to value added per employee. After the relatively rapid fall in unit labour costs expressed as labour costs to GDP seen in the second half of the 1990s was broken off by a two-year rise, they dropped again by 2% in 2002 and by a further 0.5% in 2003. Unit labour costs measured by labour costs to value added fell by 1.9% in 2002 and by 0.4% in 2003 (see the table). The decelerated decrease in 2003 was due to the considerable slowdown in the growth of labour productivity coupled with the smaller deceleration in the growth of labour costs per employee. In 2003 the ratio between labour costs and value added per employee improved appreciably more in manufacturing than in the Slovenian economy as a whole. In the first half of the 1990s, manufacturing's unit labour costs recorded an even more substantial fall than in the economy as a whole. In 2000 they rose considerably less than in the economy as a whole (see the table), while they fell by 0.8% in 2001, by 1.3% in 2002 and by 3.5% in 2003. The accelerated fall of unit labour costs was generated by the strong growth of labour productivity in manufacturing against the otherwise less substantial slowdown in the growth of labour costs per employee compared with the total economy. A comparison with EU member states shows that the Slovenian economy's competitiveness continued to improve slowly in 2003. Nevertheless, Slovenia still counts among the countries with the highest unit labour costs despite having appreciably reduced the differences (see the graph). After the substantial improvement in the Slovenian economy's competitiveness measured by labour costs to GDP (an average annual rise of 2 p.p.) compared with the EU-25 and EU-12 in the second half of the 1990s was broken off for one year, the pick-up continued after 2000, albeit at a much slower pace. Although the fall of unit labour costs also eased off in the EU-25 and the EU-12, the competitiveness of the Slovenian economy measured by this indicator recorded a mere 0.7 p.p. average annual rise against the two groups of countries in 2001-2003. In 2003 the average unit of GDP was produced by 0.60 of a single labour cost unit in the EU-25, 0.59 in the EU-12 and 0.64 in Slovenia. The dynamics ofthe Slovenian economy's competitiveness were similar to the EU-25 and EU-12, taking into account the ratio of labour costs to value added per employee (see the table). One unit of value added was produced with 0.66 of a labour cost unit in the EU-25, 0.64 in the EU-12 and 0.72 in Slovenia. The competitiveness of the Slovenian manufacturing rose faster than the competitiveness of the total economy compared with those EU countries for which data are available. Following the substantial reduction of differences, notably in the second half of the 1990s, unit labour costs in the manufacturing industries of Italy, Poland, Greece and Spain were higher than in Slovenia, while they were lower in France, Lithuania, Latvia, Estonia, the Czech Republic and Slovakia. In 1995-1999 the competitiveness of Slovenian manufacturing rose compared with all EU countries for which data are available, except Ireland. The same holds for the 2001-2002 period, except in comparison with Lithuania, Latvia and Greece. IMAD Development Report 2005 125 Analytical Appendix - Indicators Table: Unit labour costs in Slovenia and the EU, 1996-2003 Growth rates, % 1996 1997 1998 1999 2000 2001 2002 2003 Unit labour costs per unit of GDP' Slovenian economy -3.1 -3.1 -2.5 -2.2 3.2 0.1 -2.0 -0.5 EU 25 -0.8 -0.8 -1.0 0.0 0.4 0.5 -0.6 -0.3 EU 12 (euro area) -1.0 -1.2 -1.4 -0.2 -0.1 0.2 -0.3 -0.1 Unit labour costs per unit of value added2 Slovenian economy -3.8 -4.0 -2.1 -1.7 1.5 0.2 -1.9 -0.4 EU 25 -0.7 -0.4 -0.6 0.5 0.3 0.3 -0.7 -0.3 EU 12 (euro area) -1.1 -0.9 -1.0 0.4 -0.1 -0.1 -0.3 -0.1 Slovenian manufacturing -7.1 -7.0 -1.7 -2.4 0.7 -0.8 -1.3 -3.5 Source: SORS, Eurostat. Notes: 'compensati on of employees i n current prices di vided by GDP per employee i n current prices; 2compensati on of employees i n current prices divi ded by value added per employee in current prices. Figure: Unit labour costs (relative to GDP) in Slovenia and the EU - ratios in 2003 b > o 5 CO >y c lo Spain >> (U O "a c Q: 03 E D LU 03 EE 03 (U 03 c a 03 U) "03 S 00 OJ o ü_ aj N o Q o X Sources: SORS, Eurostat, calculations by IMAD. IMAD Development Report 2005 126 Analytical Appendix - Indicators Market share The increase in Slovenia's aggregate market share from 0.48% in 2000 to 0.53% in 2003 indicates that the still relatively high growth of Slovenian merchandise exports seen after 2000 (up by an annual rate of 6% in real terms) against the strong slowdown in the economic activity in Slovenia's main trading partners was the result of an improvement in Slovenian economy's export competitiveness'. After two years of slightly stronger growth, the growth of the Slovenian aggregate market share decelerated strongly in 2003 (from 4.4% in 2001 and 5.6% in 2002 to 0.7% in 2003). The subdued growth was largely due to the resumed decline in two important markets for Slovenian exporters: the German one (after two years of growth) and the French one (after three years of growth), and the accelerated fall in the Croatian market, which had already hit an alltime low in 2002. On the other hand, Slovenia's market share continued to rise robustly in the Italian and US markets. After a one-year decline, a renewed pick-up was also recorded in the Russian market. In the breakdown of industrialproducts, the groups machinery and transport equipment as well as chemicals recorded the biggest market share growth in the global market in 2001-2003. While Slovenian machinery and transport equipment exporters were also in the lead in the EU-15 market, Slovenia's market share of chemicals in the EU-15 stagnated at the 2000 level in 2003. Market share growth was below the average in iron and steel, other semi-manufactures, textiles and other consumer goods. Despite the slower fall in 2003, the market share of clothing dropped sharply in 2001-2003 - by almost a quarter in the world market, and by over a third in the EU-15. After 2000, Slovenian exporters' market position improved considerably better in the markets outside the EU-15 than in the EU-15 countries. Slovenia's global market share, albeit substantially smaller, rose by one-quarter, hence its growth was much faster than in the EU-15 where the market share increased by one-tenth (see the graph). In 2001-2003, Slovenia was approximately in the middle among the 25 EU member states in terms of the growth of its market share in the global and EU markets. Slovenia's market share grew faster than the share of most euro-area countries while markedly lagging behind the growth of most other countries, especially the new EU members. In the first nine months of 2004, the growth of Slovenia's aggregate market share strengthened slightly compared to 2003 albeit it still lagged behind the growth achieved in 2001-2002. The increase in Slovenia's aggregate market share (from the 0.53% average of 2003 to the 0.54% average of the first nine months of 2004) was largely the result of the renewed growth of Slovenia's market share in the French and Croatian markets following the drop seen in these markets last year, and of accelerated growth in the Austrian and Russian markets. The continued slow decrease of Slovenia's market share in the German market was accompanied by a drop in the Italian and US markets after the robust growth there last year. 1 Conversely, the fall in Slovenia's market share from 0.58% in 1996 to 0.48% in 2000 reveals that the otherwise vibrant aggregate growth of Slovenian merchandise exports in that period (up by an annual rate of 9.4% in real terms) was more the result of export markets growth than any improvement in the Slovenian economy's export competitiveness. The drop in Slovenia's market share in 1996-2000 was at least partly due to the predominantly defensive restructuring of the corporate sector and the related processes of rationalisation, reducing capacity, discontinuing non-profitable product ranges, and other measures aimed at adjusting production to the changed market and other conditions. IMAD Development Report 2005 127 Analytical Appendix - Indicators Table: Slovenia's market share1 in the main trading partners, % 1996 1997 1998 1999 2000 2001 2002 2003 20042 Total (15 countries) 0.583 0.574 0.584 0.511 0.478 0.500 0.528 0.531 0.541 Germany 0.562 0.553 0.544 0.554 0.478 0.500 0.523 0.489 0.479 Italy 0.537 0.595 0.571 0.533 0.499 0.489 0.506 0.574 0.564 France 0.206 0.163 0.242 0.155 0.183 0.191 0.211 0.184 0.193 Austria 0.816 0.864 0.892 0.873 0.911 0.928 0.935 0.942 0.999 Netherland 0.067 0.065 0.073 0.070 0.069 0.074 0.079 0.084 0.074 Belgium 0.046 0.053 0.093 0.081 0.055 0.056 0.046 0.045 0.059 Spain 0.037 0.046 0.050 0.056 0.054 0.058 0.066 0.089 0.100 UK 0.057 0.049 0.050 0.052 0.055 0.078 0.073 0.073 0.076 Czech Republic 0.536 0.542 0.488 0.558 0.477 0.464 0.467 0.453 0.434 Slovakia 0.621 0.484 0.562 0.546 0.550 0.565 0.753 0.815 0.750 Hungary 0.665 0.571 1.533 0.517 0.525 0.466 0.490 0.529 0.509 Poland 0.386 0.370 0.384 0.416 0.462 0.484 0.521 0.515 0.470 USA 0.031 0.028 0.028 0.025 0.022 0.021 0.024 0.037 0.034 Croatia 10.980 9.206 9.723 8.615 8.733 8.741 8.429 8.030 8.849 Russia 0.443 0.457 0.409 0.329 0.433 0.526 0.495 0.521 0.565 Source: SURS, Eurostat (NewCronos), WIIW (Monthly Report, various issues), U.S. Census Bureau (Foreign Trade Division). Notes: 1market shares are calculated as the weighted average of Slovenia's merchandise exports in the imports of its main trading partners determined by the size of their shares in Slovenia's exports. The shares of individual trading partners in Slovenia's merchandise exports are also used as weights in calculating the weighted average (using Fisher's formula). 2data for nine months. Figure: Slovenia's market shares in 2000 and 2003, % A. PRIMARY PRODUCT B. MANUFACTURES 1. Iron and steel 2. Chemicals 3. Other semi-manufactures 4. Machinery and transport e. 4.1. Power generating machinery 4.2. Other non-electr. mach. 4.3. Office mach. and telec. equip. 4.4. Electrical machinery and app. 4.5. Automotive products 4.6. Other transport equipment 5. Textiles 6. Clothing 7. Other consumer goods C. OTHER PRODUCTS TOTAL MERCHANDISE 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Sources: SORS, WTO, calculations by IMAD. IMAD Development Report 2005 128 Analytical Appendix - Indicators Composition of merchandise exports according to factor intensity Over the last few years, the structure of Slovenia's merchandise exports recorded the biggest increase in the total share ofmedium- and high-technology-intensive products1, which is favourable in terms of effective allocation of available resources. In 19951998, the share of these products in total merchandise exports increased by 5.3. p.p. in Slovenia (EU-25 average: 3.9. p.p.) mainly due to increased exports of medium-technology-intensive products (personal vehicles, household equipment, pumps and compressors). In 1998, medium- and high-technology-intensive products accounted for 52% of Slovenia's merchandise exports, 5.9 percentage points less than the average of the EU-25. In 1999-2002, growth in Slovenia's exports ofmedium- and high-technology-intensive products slackened and fell to below the EU-25 rate. While the share of medium-and high-technology-intensive products exports increased by an average of 1.8 p.p. annually in Slovenia in 1995-1998 (by 1.3 p.p. in the EU), growth in the share of these exports declined to 0.8 p.p. annually in 1999-2002 (0.9 of a percentage point in the EU). Medium and high-technology intensive products comprised 54% of Slovenian merchandise exports in 2002 (61.2% in the EU). According to the latest available comparable data, the gap behind the EU average was hence similar as it was in 1995 (around 7.2 p.p.). It is encouraging that the share of high-technology-intensive products in total exports increased more rapidly in Slovenia than in the EU-25 over the last few years. In 2002, the share of high-technology-intensive products in total exports was modest in Slovenia compared to the EU-25 (16.5% and 28.2%, respectively), however, this share rose faster in Slovenia than in the EU-25 in 1999-2002 (by 0.2 p.p.). While in 2003 the share of high-technology-intensive products in total exports fell in the EU countries for which comparable data are available, Slovenia again recorded a considerable increase in these exports (up 1.6 p.p.) mainly on account of the rapidly growing share of pharmaceutical products exports. The share of high-technology-intensive products thus reached 18.1% of Slovenia's total merchandise exports in 2003. The period after 1995 has been characterised by the falling share of low-technology-intensive and labour-intensive products in total merchandise exports2. In 2002, these products accounted for 30.0% of Slovenia's exports of goods (17.5% in the EU-25) after their share had fallen by 1.6 p.p. since 2000 (by about 0.8 p.p. annually). The share of these products in total merchandise exports continued to decline in 2003 (see the table). The share of natural resource-intensive products3 in Slovenia's merchandise exports shrank at a slower pace than in the EU in 1995-1998; since then, this share has stagnated in Slovenia while falling further in the EU. In 1995-1998, the share of resource-intensive products in Slovenian exports fell by about 0.4 p.p. per year, and only 0.2 p.p. per year in 1999-2002. In 1995, Slovenia's share of resource-based exports in the total exports of goods was 3.4 p.p. lower than the EU-25 average. However, Slovenia's share (14.6%) almost equalled the average share recorded in the EU-25 in 2002 (14.8%) because Slovenia's exports of resource-based products decreased at a much slower pace than in the EU-25. According to figures for 2003, the share of these products in Slovenia's merchandise exports sustained the level of the previous year, while in the EU countries for which data are available it generally shrank by 0.2 p.p. (see Note 1 under the table). The main groups of natural-resource intensive products in Slovenia's exports of goods were: aluminium, finished mineral manufactures, electricity, rough and worked wood, veneer and other manufactured wood, wood manufactures, IMAD Development Report 2005 129 Analytical Appendix - Indicators and non-alcoholic and alcoholic beverages. The slower declining in the share of these products seen after 1999 has largely been underpinned by the growing shares of aluminium and electricity exports. The available figures for 2004 (the first nine months) show a considerable decrease in the share of resource-intensive products in total exports (down 0.7 p.p.) largely due to the appreciable drop in the shares of wood manufactures and non-alcoholic & alcoholic beverages. Table: Structure of merchandise exports by factor intensity in Slovenia and the EU 25 in 1995-2003, in % 1995 1996 1997 1998 1999 2000 2001 2002 20031 Resource-based Slovenia 16.6 16.1 16.6 15.4 15.1 15.3 15.1 14.6 14.6 EU 25 20.0 19.7 19.0 17.5 17.5 18.0 17.6 14.8 16.4 Labour-intensive Slovenia 25.6 24.2 23.0 22.5 22.8 21.7 21.4 20.1 18.6 EU 25 12.1 12.0 11.9 11.6 11.2 10.6 10.6 10.4 10.5 Low-technology intensive Slovenia 9.7 9.2 8.9 8.8 9.1 9.9 9.8 9.9 10.1 EU 25 8.1 7.6 7.5 7.6 7.1 6.9 6.9 7.1 7.6 Medium-technology intensive Slovenia 31.9 33.6 34.5 37.3 36.7 36.4 36.4 37.5 37.3 EU 25 30.1 31.0 30.8 31.7 31.3 30.1 30.7 33.1 33.7 High-technology intensive Slovenia 14.8 15.5 15.7 14.7 14.9 15.3 15.9 16.5 18.1 EU 25 23.9 24.4 25.6 26.3 27.3 28.6 28.5 28.2 26.3 Source: United Nations Conference on Trade and Development: Handbook of Statistics 2004, Trade structure by product and country group, Classification of world merchandise exports: Trade and Development Report 2002, Annex 1 to chapter III, Report by the secretariat of United Nations Conference on Trade and Development; IMAD's calculations. Notes: The classification of products into groups is based on the UN methodology (United Nations Conference on Trade and Development: Classification of world merchandise exports, Trade and Development Report 2002, Annex 1 to chapter III); this classification does not comprise all products, therefore the sum of the five product groups does not necessarily equal 100; 1 data for the EU do not include external trade data for Greece, Ireland, Luxembourg, Malta, the Netherlands, Portugal and Spain. 1 Medium- and high-technology-intensive products comprise merchandise goods with the most dynamic global growth, the highest share of expenditure on R&D in value added (chemicals, pharmaceutical products, plastic products, machinery and equipment, telecommunications equipment, equipment for medical and scientific purposes and measurements, cameras and photographic equipment, personal vehicles, household equipment). The classification into medium- and high-technology intensive products is based on the UN methodology (United Nations Conference on Trade and Development: Classification of world merchandise exports, Trade and Development Report 2002, Annex 1 to Chapter III). 2 The groups of low-technology-intensive and labour-intensive products include products with the lowest value added per employee, such as: clothing, textile products, footwear, furniture, glass and glass products, flat-rolled iron products, base metal products. 3 Cutting the share of products that involve intensive exploitation of natural resources is key from the viewpoint of sustainable development. This group of products is characterised by low value added per unit of production, a high content of natural resources, and relatively simple production technology. It comprises the manufacture of food, beverages, raw materials, mineral fuels, animal and vegetable oils and fats, leather, veneers and other manufactured wood (boards), and ferrous and non-ferrous metals. IMAD Development Report 2005 130 Analytical Appendix - Indicators Share of gross fixed capital formation in GDP The revision of the national accounts in 2004 has not revealed any essential changes in the share of gross fixed capital formation in GDP. On average, the share of gross fixed capital formation in GDP rose by 0.2 p.p. in 1995-2002. Relatively more significant changes were recorded at the end of the analysed period: according to the latest available data, the share of gross fixed capital formation in GDP was revised downwards for 2000 (by 0.6 p.p.) and upwards for 2001 and 2002 (by 0.5 p.p. and 0.7 p.p., respectively). The share of gross fixed capital formation rose appreciably in the second half of 1990s while decreasing in 2000-2002. The technical composition1 of investment shows that all types of investment recorded a real increase in 1995-2002. In the first period, the increase was largely underpinned by investment in non-residential construction (due to the construction of transport infrastructure), in addition to the rise in investment in machinery and equipment and dwellings. After 2000, the share of investment fell in machinery and equipment, dwellings and other construction (due to slower building of transport infrastructure). In 2003, the share of gross fixed capital formation in GDP rebounded. Increases were recorded in investment in machinery and equipment (notably transport equipment) and non-residential construction (transport infrastructure), while investment in dwellings dropped again. In comparison with more advanced countries, Slovenia has a bigger share of gross fixed capital formation in GDP but a smaller share of housing investment. Slovenia's share of investment in machinery and equipment is higher than in more developed countries, which is expected considering Slovenia's lower physical capital position. The relatively low share of housing investment (see the graph below), on the other hand, is surprising especially when considered together with the figure indicating the number of dwellings per thousand inhabitants. According to the UNECE (United Nations Economic Commission for Europe), Slovenia's number of dwellings per thousand inhabitants was lower than in most EU countries in 20002. 1 By technical composition, investment is divided into tangible and non-tangible fixed assets. Tangible fixed assets are further divided into 'construction', 'machinery and equipment', and 'land improvement and breeding stock'. Investment in construction and in machinery & equipment represented the lion's share of total investment. 2 Among the 18 countries for which data are available, the number of dwellings per 1000 inhabitants was lower than in Slovenia just in Ireland, Slovakia and Poland, while all other countries for which data are available recorded higher shares (among others Latvia, Estonia, Hungary, Spain and Greece). Similarly, Slovenia was at the bottom of the EU countries by the number of rooms per inhabitant in 2003 according to the survey entitled Quality of Life in Europe (European Foundation for the Improvement of Living and Working Conditions). IMAD Development Report 2005 131 Analytical Appendix - Indicators Table: Technical structure of gross fixed capital formation in GDP in Slovenia in 1995-2003, in % 1995 1996 1997 1998 1999 2000 2001 2002 2003 Machinery and equipment 10.6 9.8 10.2 10.7 12.0 11.5 11.1 10.3 10.5 - transport equipment 2.4 2.1 1.8 2.1 2.2 2.5 2.3 2.2 2.4 Construction 9.6 11.3 11.9 12.2 13.3 12.7 12.2 11.9 12.5 - dwellings 3.4 3.8 3.8 3.9 4.5 3.7 3.8 3.5 3.4 Other 0.5 0.6 0.8 0.8 1.1 1.0 1.0 0.9 0.9 Total 20.6 21.7 22.8 23.8 26.3 25.1 24.5 23.3 23.9 Source: Eurostat (New Cronos). Figure: Share of gross fixed capital formation and share of gross housing investment in GDP for EU countries in 2003 35 30 25 CL Q 20 (J 20 tj S? 15 CO < 10 □ Gross housing investment □ Gross fixed capital formation Si O > O 5 = -F 5 CO Source: Eurostat (New Cronos). Note: data for Belgium, Malta, the Netherlands, Poland and Portugal are unavailable for 2003. IMAD Development Report 2005 132 Analytical Appendix - Indicators Foreign direct investment The share of inward FDI stock in GDP climbed from 9.5% to 20.7°% in 1995-2003, while the share of outward FDI in GDP rose from 2.6°% to 7.5%. This seemingly favourable result conceals the actually much less favourable trends and characteristics since it was largely the consequence of specific developments in 2001 and 2002 when relatively high (for Slovenian circumstances) FDI inflows were recorded, totalling EUR 412.4 m in 2001 and the record-high EUR 1,750.4 m in 2002. Following the strong increase in FDI inflows in Slovenia in 2001 and 2002 these returned to the levels seen before 2001 and came in at the modest EUR 298.8 m in 2003. There was no improvement in 2004 when the FDI inflows in the January-August period totalled a mere EUR 127.0 m, which is even less than in the same period of2003 (EUR 163.9 m). The high FDI inflows in 2001 and especially 2002 were underpinned by a number of large foreign acquisitions, primarily the takeover of Lek by the Swiss company Novartis and the purchase of a 34% share in the NLB bank by the Belgian KBC bank. The FDI outflows from Slovenia have been on a steady increase: they rose from EUR 161.2 m in 2001 to EUR 168.1 m in 2002 and to the high EUR 413.7 m in 2003. Hence, Slovenia was a direct net outward investor, which is not a normal situation for a country at Slovenia's level of development. The situation remained similar in 2004. FDI outflows in January-August were once again at a record level, EUR 297.7 m (EUR 264.6 m in the same period of 2003). Data indicate that in 2004 Slovenia again recorded net FDI outflows. As far as inward FDI is concerned, a comparison with EU member states shows that Slovenia is among those countries with the lowest shares of FDI stock in GDP. The only old EU member states that recorded lower shares in 2003 were Italy and Greece while all new members had higher shares of FDI in GDP than Slovenia. Among the new member states the highest shares of FDI in GDP were found in Estonia (77.6%), Malta (63.5%), Hungary (51.8%) and the Czech Republic (48.0%). All countries included in the analysis significantly increased their shares of FDI stock in GDP in 1995-2003: by 19.6 p.p. in the EU-15 as a whole and by 11.2 p.p. in Slovenia. In none of the new member states was the increase less than 20 p.p. - in most of them it was actually appreciably larger (UNCTAD 2004). Slovenia recorded better results than other new member states in the area of outward FDI. Nevertheless, Cyprus and Estonia were ahead of Slovenia by this indicator as well in 2003. As expected, Slovenia was way behind old EU member states (except Greece) in terms of outward FDI in GDP. The Slovenian economy's internationalisation is primarily taking place through external trade flows rather than FDI. It should be noted that Slovenia increased its shares in all relevant indicators in 2003 over the year before. The biggest rise was seen in FDI inflows as a result of significant one-off inflows seen in the analysed period. The analysis of the degree of internationalisation of the Slovenian economy shows interesting results if we look at Slovenia's shares in different global macroeconomic aggregates. In 2003, these shares were as follows: (i) global FDI inflows (20012003): 0.1164% (an increase of 0.0414 over the year before); (ii) global inward FDI stock: 0.0769% (an increase of 0.0196); (iii) global FDI outflows (2001-2003): 0.0396% (an increase of 0.0277); (iv) global outward FDI stock: 0.0282% (an increase of 0.0067); (v) global GDP: 0.0765% (an increase of0.0084); and (vi) global exports: 0.1699% (an increase of 0.0067). What stands out is the wide difference between the high share in exports and the substantially lower share in inward and outward FDI. Slovenia's performance in attracting FDI isfar below its potential. The performance of a country in attracting FDI is measured by how successfully the country exploits its potentials to attract FDI. This performance can be seen from a comparison between the FDI Potential Index and the FDI Performance Index (for the definition of both indices see UNCTAD 2004). In 2000-2002 Slovenia was ranked 27th among 140 countries according to the FDI Potential Index while it was ranked much lower, 59th, according to the FDI Performance Index. Without the high FDI inflows of 2002 Slovenia would have dropped below the 100th place according to its actual performance. This result indicates that the situation in Slovenia is unconducive to foreign investment and that policy has not been overly successful in attracting FDI. IMAD Development Report 2005 133 Analytical Appendix - Indicators Table: Flows and stocks of inward and outward FDI1 in Slovenia in 1994-20032, EUR m 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Inward FDI Year-end stock 1,080.8 1,376.0 1,611.6 1,999.8 2,369.5 2,675.0 3,109.8 2,952.4 3,967.9 5,069.7 Annual inflows3 98.3 117.4 138.2 294.9 194.3 99.2 149.1 412.4 1,750.4 298.8 Stock as % of GDP 9.2 9.5 10.7 12.4 13.6 14.2 15.1 13.5 16.9 20.7 Outward FDI Year-end stock 288.6 382.3 370.6 416.2 542.8 624.7 825.3 1.139.2 1,461.5 1,848.9 Annual outflows4 10.9 7.8 -5.6 -27.7 4.9 -44.7 -71.7 -161.2 -168.1 413.7 Stock as % of GDP 2.5 2.6 2.5 2.6 3.1 3.3 4.0 5.2 6.2 7.5 Source: Bank of Slovenia. Notes:1 FDI whereby a foreign investor holds a 10% or higher share in a company; 2from 1996 onwards FDI in indirectly affiliated enterprises is also included; 3inflows are in principle lower than changes in stock because international payments transactions only cover part of changes in stock. The main difference is that inflows do not cover changes in net liabilities to foreign investor, while inflows do not include figures on companies in second affiliation. From 1995 onwards data on reinvested earnings are also included in inflows and, consequently, inthe balance of payments. 4The minus sign indicates an outflow. Figure: Inward and outward FDI stock as a percentage of GDP in old and new EU member states in 1995 and 2003,% World EU15 Austria Belgium, Luxembourg Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden U. Kingdom New Member States Cyprus Czech R. Estonia Latvia Lithuania Hungary Malta Poland Slovakia Slovenia 140 120 100 80 60 40 % 20 0 20 40 60 80 Sources: UNCTAD. 2004. World Investment Report 2004. New York and Geneva: United Nations; for Slovenia: Bank of Slovenia. — - □ 1995 -4 m ■ IMAD Development Report 2005 134 Analytical Appendix - Indicators Total assets of banks Due to the banking sector's importance the indicator of total assets of banks relative to gross domestic product is one of the key indicators of the Slovenian financial sector's development level. Its value has been rising constantly yet it remains below the levels achieved by advanced countries. The ratio of the banks' total assets relative to GDP increased by 2.3. p.p. to total 88% in 2003. The indicator's value rose by 11.9 p.p. in 1995-2000 and by a further 12.9 p.p. in 2000-2003. If we analyse the banking sector's balance sheets from previous years we find that initially growth was largely underpinned by stronger lending, while later on it was primarily generated by investment in securities. In 2003 and 2004 the banking sector's assets increased again on the back of the pick-up in lending activity, notably in foreign currency loans to enterprises and OFO and in household loans. Total assets of the banking sector (excluding savings banks and savings co-operatives) rose by 11.1% in 2003 (the smallest increase so far) and continued to grow at a softer pace in 2004. The highest rise in the banking sector's total assets was recorded in long-term investment in the client capital that rose by over a quarter and contributed around 0.3 p.p. to growth. The largest contribution (8 p.p.) came from loans to the non-banking sector whose share strengthened by 2.5 p.p. at the end of 2003 year on year to total 50.2%, which was due to their 16.8% nominal growth. These loans thus represented by far the most important item in the banking sector's total assets. A lower growth rate relative to 2001 and 2002 was recorded in investment in non-tradable debt securities which were up 12.9% compared to the year before (57.5% in 2002), contributing 3.7 p.p. to growth. The volume of tradable securities increased by just over 1% while its contribution to growth was negligible because of its small share (4.6% of the banks' total assets). The gradual easing of growth in the banking sector's total assets continued in the first ten months of 2004 - compared to end-2003 it grew by 8.4% (9.4% in the same period of 2003). In contrast to the previous years, however, the level of non-tradable debt securities dropped by 10%. Despite the continued increase in the indicator's value since 1993 in Slovenia (from 65.2% to 88%) Slovenia's gap behind the EU-15 increased in both absolute and relative terms. The ratio of banks' total assets to GDP averaged 285.4% in the EU-15 in 2003 and was by 16.3 p.p. higher than the year before1. In the EU-25 the value of the indicator stood at 276%. The small difference between the EU-25 and EU-15 (relative to the difference between the new member states and the EU-25) confirms the insignificance of the banking system of the new EU member states (whose indicator's value totalled 79.9%) in the European Union's banking system since their total assets represented a mere 1.3% of the entire European banking sector's total assets. Bearing in mind that new member states account for less than 5% of the EU-25 GDP, we can establish that the banking sector's gap behind the EU average is even wider than in other sectors of the economy. According to the value of the indicator measuring total assets relative to GDP Slovenia is far behind the comparably developed countries such as Greece and Portugal (130.5% and 244%, respectively). Among the new member states (79.9%), Malta, Cyprus and the Czech Republic have recorded higher values than Slovenia (412.3%, 307% and 97.7%, respectively). Assuming that the need for financing will become even greater with further economic development, and in view of the anticipated levelling out of the differences between domestic and foreign financing costs, the value of the indicator of banks' total assets relative to GDP is set to continue rising. IMAD 135 Development Report 2005 Analytical Appendix - Indicators Table: Structure of banks' total assets for 1995-2003, in SIT bn 1995 2000 2001 2002 2003 Assets ',475.3 3,125.3 3,876.8 4,553.2 5,057.5 % of GDP 63.2 75.' 8' .4 85.7 88.0 Loans to the banking sector 253.6 364.4 396.2 373.' 345.2 Loans to non-banking sectors 607.8 ',635.2 ' ,9' 3.9 2,'72.5 2,538.' Securities 414.7 793.2 ','09.3 ',546.7 ',719.7 Other assets '99.3 332.5 457.3 460.9 454.5 Source: Bank of Slovenia's Annual Report (various volumes). Figure: Total bank assets in selected EU member states in 2003, as a % of GDP Q O 450 400 350 - 300 250 200 150 100 50 , EU-25 E 5 03 2 =3 V -1 U U qj m >y o E < E \m > o id c c « cö Sources: Bank of Slovenia, central bank bulletins, annual reports of supervisory institutions, European Banking Federation. Note: *new EU member states. 1 This leap in the indicator's value was largely produced by the 14.6% increase in the banking sector's total assets in the UK representing over 30% of the EU-25 banking sector's total assets. IMAD Development Report 2005 136 Analytical Appendix - Indicators Insurance premiums After the slightly higher growth rates seen in 2001 and2002 the year-on-year nominal growth of insurance premiums fell slightly in 2003 although it still totalled over 10%%. In the breakdown of insurance premiums, life insurance is still on the increase and represents almost a quarter of the total insurance premiums. Its growth rate in 2003 was nearly twice as high as the growth rates in non-life insurance. In 2003 the volume of insurance premiums1 reached SIT 298.2 bn, recording a 11.7% nominal rise compared to the previous year. In 2003, insurance premiums achieved 5.2% of gross domestic product, 0.2 p.p. more than the year before. The volume of life insurance rose by 17.8% in nominal terms; the largest, two-thirds increase, was recorded in life insurance tied to mutual funds' points. The increase in this type of insurance is most probably attributable to the high yield rates of mutual funds and the new insurance schemes on offer. A significant contribution also came from supplementary pension insurance that was up 17.4% in 2003. The volume of life insurance rose by 19% in real terms over the past ten years and by 11.6% in 2003. The value of Slovenia's indicator of insurance premiums relative to gross domestic product is at a low level compared to the European Union. The average in the European Union (excluding Estonia) stood at 8.6% (8.8% in the EU-15). Slovenia still has the highest value in this indicator among the new member states. It has also come ahead of some EU-15 countries (Greece, Luxembourg). While Slovenia's relative gap behind the EU average in the insurance industry was smallest relative to other segments of financial intermediation, it should be noted that this was largely due to the high level of non-life insurance that achieved 4.0% of GDP in 2003. Only Great Britain, which has one of the most developed insurance markets, recorded a higher value in this indicator. The gap was appreciably wider in life insurance which accounted for 23.9% of all insurance premiums collected in Slovenia in 2003 (19.4% in 2000) and achieved 1.2% of GDP. The indicator's value edged up by 0.1 p.p. for the fourth consecutive year. The shares of life insurance premiums totalled 5% in the EU (excluding Estonia) and 5.1% in the EU-15, while their shares in the total premium stood at 57.8% for the former and 58.2% for the latter. The volume of life insurance premiums in new member states amounted to a mere 1% of the total EU-25 and came in at 1.3% of GDP. Slovenia therefore also lags behind the average of the new EU member states by its level of life insurance. Compared with the year before no change was observed since Malta, Cyprus, the Czech Republic and Slovakia still have higher shares of life insurance in GDP than Slovenia. In future we can expect a further increase in life insurance especially due to the rising importance of old-age saving, the expanded offer of foreign insurance companies and the combined banking and insurance services (in 2003 the share of premiums collected in banks was 5.8%). The calculation includes institutions that are not legally operative as yet (KAD - the Slovenian capital company, Fund for Craftsmen and Entrepreneurs, Slovenian Export Corporation) IMAD Development Report 2005 137 Analytical Appendix - Indicators Table: Insurance premiums by type of insurance, Slovenia 1995-2003 1995 2000 2001 2002 2003 As a % of GDP Insurance premiums total 4.3 4.6 4.9 5.1 5.2 Life insurance 0.6 0.9 1.0 1.1 1.2 Non-life insurance1 3.7 3.7 3.8 3.9 4.0 Structure, % Insurance premiums total 100.0 100.0 100.0 100.0 100.0 Life insurance 14.8 19.4 21.4 22.7 23.9 Non-life insurance 85.2 80.6 78.6 77.3 76.1 Year-on-year nominal growth rates, % Insurance premiums total 62.6 12.5 19.3 16.1 11.7 Life insurance 67.8 20.9 31.5 23.2 17.8 Non-life insurance 61.7 10.7 16.3 14.1 9.9 Source: Statistical Insurance Bulletin 2003. Note: 'The main types of life insurance include: health insurance, insurance against liability with regard to the use of motor vehicles, land motor vehicles insurance, accident insurance, and fire and natural disaster insurance. Figure: Volume of all insurance premiums, life insurance and non-life insurance relative to GDP in selected EU member states in 2003, % 14 12 10 8 6 4 2 0 □ Non-life insurance •EU-25 B ¿T o CO dj 03 03 'c 03 'c 03 'c 03 O 03 03 =3 1- > O "w LU .n E o CO □ a: ra ra TJ C < C¿ 03 03 z 03 en =3 03 _1 O CL LU > U) c o (U CO O CO I N O Sources: Eurostat (NewCronos); SORS. Notes: Data in the graph include income in kind and are mutually comparable for the analysed countries; Slovakia -2002. data for 2003; Latvia and Turkey - data for The IMAD's Other Publications Development Report IMAD 2005 Analysis, Research and Development Spring Report 2004 Autumn Report 2004 Human Development Report Slovenia 2002-2003 Development Report 2004 Slovenia - On the Way to the Information Society Working papers Productivity growth and functional upgrading in foreign subsidiaries in the Slovenian manufacturing sector, M. Rojec, B. Majcen, A. Jaklič, S. Radoševič An analysis of past and future GDP growth in Slovenia, E.L.W. Jongen Future GDP growth in Slovenia: Looking for room for improvement, E.L.W. Jongen On the possibility of negative effects of EU entry on output, employment, wages and inflation in Slovenia, A. Brezigar IB revija IB revija 3/2004 VSEBINA: Luka Žakelj: Učinki in posledice skupne zaposlovalne politike v EU; Richard Sendi, Andreja Cirman: Analiza trga stanovanj v Sloveniji; Štefan Bojnec, Matjaž Novak: Kakšna je slovenska blagovna menjava po tehnološki intenzivnosti?; Miran Jus: Sporazumi SID z IKA in drugimi tujimi finančnimi institucijami; Jana Javornik: Spol kot določnica družbenega položaja posameznika/posameznice - na poti k androgini družbi?; Miroslav Verbič: Mikroekonometrična analiza odločitev o upokojevanju v Sloveniji; Marko Simoneti, Aleksandra Gregorič: Menedžersko lastništvo in uspešnost poslovanja privatiziranih podjetij v Sloveniji; PREDSTAVITVE: Jana Javornik: Percepija življenjskih pogojev v razširjeni Evropi, Poročilo o raziskavi kvalitete življenja v Evropi, maj 2004 (Perceptions of Living Conditions in an Enlarged Europe). Journal for Institutional Innovation, Development and Transition IB Review, Vol. 7/2003 Ansgar Belke, Ralph Setzer: On the Benefits of a Stable Exchange Rate for the EU Accession Countries; Thomas Dufhues: Transformation of the Financial System in Vietnam and its Implications for the Rural Financial Market - an update; Bruno S. Frey: Direct Democracy for Transition Countries; Maurizio Bovi: The Nature of the Underground Economy - some Evidence from OECD Countries; Dennis C. Mueller, Helmut Dietl, Evgeni Peev: Ownership, Control and Performance in Large Bulgarian Firms. Summaries. Internet http://www.gov.si/umar Subscription Form Development Report IMAD 2005 Name Address Signature date: Please tick below Periodicals EUR Slovenian Economic Mirror 70 Spring Report 15 Autumn Report 15 IB revija (annual subscription, including JIIDT) 55 Journal for Institutional Innovation, Development and Transition (IB Review) 15 Development Report 15 Books M. Stare, R. Kmet Zupančič, M. 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