#IMAD O (N O a (U (U E a jD > (U ■Ö Development Report 2011 (Poročilo o razvoju 2011) ISSN 1581-6907 Ljubljana, July 2011 Publisher: IMAD, Ljubljana, Gregorčičeva 27 Responsible person: Boštjan Vasle, MSc, Director Editor in Chief: Rotija Kmet Zupančič, MSc Assistant Editor in Chief: Matevž Hribernik Authors of the Development Report 2011: Rotija Kmet Zupančič, MSc (project head, editor, Introductory remarks, Main findings, A competitive economy and faster economic growth, Increasing competitiveness and promoting entrepreneurial activity, Increasing the competitiveness of services, Internet use); Matevž Hribernik (assistant to the editor, Indicators of Slovenia's development, Institutional competitiveness, Efficiency of the judiciary, Increasing competitiveness and promoting entrepreneurial activity); Lidija Apohal Vučkovič (Main findings, A modern welfare state and higher employment, Increasing labour-market flexibility, Modernising social protection systems, Living conditions, reduction of social exclusion and social risks; Marijana Bednaš, MSc (Main findings, Macroeconomic stability); Gonzalo Caprirolo, MSc (Macroeconomic stability, General government debt); Tanja Čelebič, MSc (Education and training, Access to services of general interest and housing, Culture, Expenditure on educational institutions per student, Public expenditure on education, Ratio of students to teaching staff, Science and technology graduates, Share of the population with a tertiary education, Private expenditure on education, Adult participation in education, Book production and public libraries); Lejla Fajič (Macroeconomic stability, Real growth of gross domestic product); Barbara Ferk, MSc (Living conditions, reduction of social exclusion and social risks, Culture); Marko Glažar, MSc (Synthetic estimate of Slovenia's development); Marjan Hafner (Financial services, Total assets of banks, Insurance premiums, Market capitalisation of shares); Katarina Ivas, MSc (Integration of measures to achieve sustainable development, Integrating environmental criteria with sectoral policies, Greenhouse-gas emissions, Environmental taxes and implicit tax rate on energy consumption); Jana S. Javornik, PhD (Human development index); Slavica Jurančič(Increasing competitiveness and promoting entrepreneurial activity, Market share, Unit labour costs); AlenkaKajzer, PhD (Education and training, Increasing labour-market flexibility, Long-term unemployment rate, Temporary employment, Part-time employment); Maja Kersnik, MSc (Modernising social protection systems, Living conditions, reduction of social exclusion and social risks, Sustained population growth, Social protection expenditure, Risk of poverty and material deprivation of the population); Dušan Kidrič (Modernising social protection systems); Mojca Koprivnikar Šušteršič (Increasing the competitiveness of services, Share of non-financial market services); Jasna Kondža (General government balance, General government sector expenditure according to economic classification, Economic structure of taxes and contributions); Mateja Kovač, MSc (Integrating environmental criteria with sectoral policies, Agricultural intensity, Intensity of tree felling); Saša Kovačič (Living conditions, reduction of social exclusion and social risks, Minimum wage); Valerija Korošec, PhD (Efficiency of the judiciary, Life satisfaction); Tomaž Kraigher (Sustained population growth, Average years of schooling, Employment rate, Unemployment rate, Old-age dependency ratio, Life expectancy and infant mortality, Fertility rate, Migration ratio); Janez Kušar (Improving spatial management); Mojca Lindič, MSc (Labour productivity); Ivo Lavrač, PhD (Improving spatial management); Jože Markič, PhD (Balance of payments, Gross external debt, Exports and imports as a share of GDP); Ana Murn, PhD (An efficient and more economical state, Quality of public finance, Institutional competitiveness, Efficiency of the judiciary, State Aid, Subsidies); TinaNenadič, MSc (Increasing competitiveness and promoting entrepreneurial activity); Janja Pečar (More balanced regional development, Regional variation in GDP per capita, Regional variation in the registered unemployment rate); Jure Povšnar (Increasing competitiveness and promoting entrepreneurial activity, Energy intensity, Renewable energy sources, Share of road transport in total goods transport); Matija Rojec, PhD (Increasing competitiveness and promoting entrepreneurial activity, Institutional competitiveness, Foreign direct investment); Metka Stare, PhD (Increasing the competitiveness of services, Research, development, innovation and use of information-communication technologies); Dragica Šuc, MSc (Integrating environmental criteria with sectoral policies); Branka Tavčar (Gross domestic product per capita in PPS); Miha Trošt (Inflation); Ana TršeličSelan (Macroeconomic stability); Ana Vidrih, MSc (Increasing competitiveness and promoting entrepreneurial activity, Research, development, innovation and use of information-communication technologies, Entrepreneurial activity, Gross domestic expenditure on research and development, Innovation activity of enterprises, Intellectual property; Ivanka Zakotnik (A competitive economy and faster economic growth, Emission-intensive industries, Structure of merchandise exports according to factor intensity); Eva Zver (Modernising social protection systems, Access to non-economic services of general interest and housing, Expenditure on health, Expenditure on long-term care, Healthcare resources). Editorial Board: Lidija Apohal Vučkovič; Marijana Bednaš, MSc; Lejla Fajič; Katarina Ivas, MSc; Alenka Kajzer, PhD; Janez Kušar; Ana Murn, PhD; Metka Stare, PhD; Boštjan Vasle, MSc. Translators: Nina Barlič, Marija Kavčič, Boris Panič, Mojca Piskernik, Sebastijan Razboršek Maček, Nataša Zajec Herceg Language Editor: Amidas d.o.o. Graphs: Marjeta Žigman Concept and Design: Katja Korinšek, Pristop DPT: Bibijana Cirman Naglič, Ema Bertina Kopitar Print: Tiskarna Littera Picta d.o.o. Circulation: 100 © IMAD, 2011. The contents of this publication may be reproduced in whole or in part provided that the source is acknowledged. Contents Introductory remarks..................................................................................................................7 Main findings................................................................................................................................9 Part I - Development by the priorities of Slovenia's Development Strategy......................................................................13 1. 1. A competitive economy and faster economic growth.............................................15 1.1 Macroeconomic stability......................................................................................................................15 1.2. Increasing competitiveness and promoting entrepreneurial activity........................................20 1.3. Increasing competitiveness of services............................................................................................24 1.3.1 Non-financial market services..............................................................................................................................25 1.3.2. Financial services..................................................................................................................................................27 2. Efficient use of knowledge for economic development and high-quality jobs........30 2.1 Education and training.........................................................................................................................30 2.2 Research, development, innovation and use of information-communication technologies.....33 3. An efficient and less costly state........................................................................................38 3.1 Quality of public finance.......................................................................................................................38 3.2 Institutional competitiveness.............................................................................................................. 41 3.3 Efficiency of the judiciary.....................................................................................................................44 4. A modern welfare state and higher employment...........................................................46 4.1 Improving labour-market flexibility...................................................................................................46 4.2 Modernisation of the social-protection systems.............................................................................47 4.3 Living conditions, reduction of social exclusion and social risks.................................................51 4.3.1 Incomes and expenditures of population.............................................................................................................52 4.3.2 Access to non-economic services of general interest and housing....................................................................55 5. Integration of measures to achieve sustainable development....................................55 5.1 Integrating environmental criteria with sectoral policies..............................................................55 5.2 Sustained population growth..............................................................................................................62 5.3 More balanced regional development..............................................................................................63 5.4 Improving spatial management.........................................................................................................65 5.5 Culture......................................................................................................................................................66 Part II - Indicators of Slovenia's development..............................69 THE FIRST PRIORITY: A competitive economy and faster economic growth.................71 Gross domestic product per inhabitant in purchasing power standards..........................................72 Real GDP growth...........................................................................................................................................74 Inflation..........................................................................................................................................................76 General government debt..........................................................................................................................78 General government balance....................................................................................................................80 Balance of payments....................................................................................................................................82 Gross external debt......................................................................................................................................84 Labour productivity.....................................................................................................................................86 Market share..................................................................................................................................................88 Unit labour costs...........................................................................................................................................90 Structure of merchandise exports by factor intensity..........................................................................92 Exports and imports as a share of GDP....................................................................................................94 Foreign direct investment..........................................................................................................................96 Entrepreneurial activity..............................................................................................................................98 Share of non-financial market services..................................................................................................100 Total assets of banks..................................................................................................................................102 Insurance premiums..................................................................................................................................104 Market capitalisation of shares................................................................................................................106 THE SECOND PRIORITY: Efficient use of knowledge for economic development and high-quality jobs.....................................................................................................................109 Share of population with tertiary education........................................................................................110 Average years of schooling of adult population..................................................................................112 Ratio of students to teaching staff..........................................................................................................114 Public expenditure on education............................................................................................................116 Private expenditure on education..........................................................................................................118 Expenditure on educational institutions per student.........................................................................120 Adult participation in education.............................................................................................................122 Gross domestic expenditure on research and development.............................................................124 Science and technology graduates.........................................................................................................126 Innovation-active enterprises..................................................................................................................128 Intellectual property..................................................................................................................................130 Internet use and access.............................................................................................................................132 THE THIRD PRIORITY: An efficient and less costly state...................................................135 General government expenditure..........................................................................................................136 Economic structure of taxes and contributions...................................................................................138 Subsidies......................................................................................................................................................140 State aid........................................................................................................................................................142 THE FOURTH PRIORITY: A modern welfare state...............................................................145 Employment rate........................................................................................................................................146 Unemployment rate...................................................................................................................................148 Long-term unemployment rate...............................................................................................................150 Temporary employment...........................................................................................................................152 Part-time employment..............................................................................................................................154 Social-protection expenditure.................................................................................................................156 Expenditure on health...............................................................................................................................158 Expenditure on long-term care...............................................................................................................160 Human development index......................................................................................................................162 Minimum wage...........................................................................................................................................164 Risk of poverty and material deprivation of the population.............................................................166 Healthcare resources.................................................................................................................................168 Life satisfaction...........................................................................................................................................170 THE FIFTH PRIORITY: Integration of measures to achieve sustainable development .. 173 Greenhouse gas emissions.......................................................................................................................174 Emission-intensive industries..................................................................................................................176 Energy intensity..........................................................................................................................................178 Renewable energy sources.......................................................................................................................180 Share of road transport in total freight transport................................................................................182 Environmental taxes and implicit tax rate on energy consumption................................................184 Agricultural intensity.................................................................................................................................186 Intensity of tree felling..............................................................................................................................188 Age-dependency ratio..............................................................................................................................190 Life expectancy and infant mortality.....................................................................................................192 Fertility rate.................................................................................................................................................194 Migration ratio............................................................................................................................................196 Regional disparities in GDP per capita...................................................................................................198 Regional disparities in the registered unemployment rate...............................................................200 Book production and public libraries.....................................................................................................202 Bibliography and sources......................................................................................................204 Part III - Appendix............................................................................211 Calculation of a synthetic estimate of Slovenia's development according to the priorities of SDS......................................................................................................................213 Introductory remarks The Development Report is a document that monitors the realisation of Slovenia's Development Strategy (SDS), which was adopted by the Slovenian Government in June 2005. SDS sets out the vision and objectives of Slovenia's development until 2013, classifying them into five development priorities with action plans. This year's report presents an overview and an assessment of the implementation of the strategy from its adoption up to 2010, except in cases where the latest data are only available for earlier years (2009 and, occasionally, 2008). Given that this is an annual report, emphasis has been placed on changes that occurred in the last year for which data are available. The Slovenian Government took note of the Development Report 2011 at its 133rd regular session of 5 May 2011 and accepted it as an analytical basis for its economic and development policies. The Development Report is divided into two parts: Part I presents an overview of the implementation of SDS across the five development priorities; Part II documents progress by means of development indicators. The findings in the report are mostly based on results obtained through a set of indicators that were designed to monitor development. We have also consulted other sources (national and international research, reports on the implementation of sectoral strategies and programmes), particularly in areas where no relevant indicators were available due to a shortage of data. The appendix contains a quantitative aggregate assessment of development, which supplements the expert approach of the report, though it cannot replace a comprehensive assessment of progress in individual areas given the time and geographical limitations in the availability of the data necessary for calculation. In a period of significant fluctuations of economic activity, some development indicators should be interpreted cautiously, as their values are affected by qualitative changes as well as changes in gross domestic product. These are indicators that are expressed in terms of GDP (as a share of GDP) for the purposes of benchmarking between countries and over time. However, during periods of significant annual fluctuations of GDP, these indicators do not necessarily reflect qualitative changes, but merely a different basis of comparison. It is essential to consider this factor in analysing changes in their value and in comparisons with other countries. In this year's report, therefore, changes in absolute values of these indicators for the year are also highlighted. The report is based on official statistical data of domestic and foreign institutions available at the end of March 2011. In the analysis, Slovenia is mostly compared with the 27 EU Member States and only as a matter of exception with the EU-25 average, whenever data for the newest EU Member States - Bulgaria and Romania - are not yet available. The terms "European average" or "EU average" thus refer to the group of EU-27 countries; the term "old Member States" refers to the EU-15 group, while the EU-12 countries that joined the European Union after the latest enlargement rounds in 2004 and 2007 are referred to as the "new Member States". Main findings SDS guidelines: Slovenia's Development Strategy (SDS) defines four key development goals: (i) the economic development goal - to reach the average level of economic development in the EU in 10 years1; (ii) the social development goal - to improve the quality of life and welfare; (iii) the intergenerational and sustainable development goal - to apply the principles of sustainability across all areas of development, including sustained population growth; and (iv) Slovenia's development goal in the international environment - to become an internationally distinctive and renowned country. 1 At the time of the adoption of SDS (2005), the most recent figures for GDP per capita in purchasing-power parity were available for 2003, Slovenia's objective to achieve the average level of economic development in the EU in 10 years thus refers to 2013. In the period of economic crisis Slovenia's per capita GDP (in purchasing-power parity) fell further below the European average, a departure from the implementation of the principal economic goal of SDS. According to the latest Eurostat data, in 2009 Slovenia's per capita GDP at purchasing-power parity stood at 88% of the EU average, down 3 p.p. over the year before and only marginally above the level achieved when SDS was adopted in 2005 (87%). We estimate that the gap will have widened in 2010 (for which Eurostat data are not yet available), as the recovery was weaker than in the EU. Decomposition of per capita GDP (to productivity and employment rate) indicates that Slovenia is lagging behind the EU in productivity, with the gap widening in the 2005-2009 period. However, the employment rate has exceeded the EU average since 2007. The economic slowdown in the last two years is largely a result of the fact that the increase in economic activity in the run-up to the crisis was insufficiently based on structural changes and improvements in competitiveness. Rapid economic growth in 2006-2008 was achieved in a period of brisk international economic growth and easy access to financing on international markets, and it was additionally buoyed by high public investment in infrastructure. Meanwhile, shifts in the economic and corporate structure towards high-technology industries and intensive use of knowledge were modest. The weak changes in the structure of the economy and its competitiveness were precipitated by an insufficient focus on technological restructuring, innovation and raising value added. Since the beginning of the implementation of SDS, industrial policy has focused on preserving existing companies whose growth prospects are questionable, rather than strengthening competitiveness and developing entrepreneurship. Effectiveness and integration of policies facilitating the transition to a knowledge-based society, a key SDS guideline in the field of economic development, has also been insufficient. Over the past few years, the volume of investment in R&D has otherwise increased, and the general effectiveness of the innovation system improved. However, there is still a gap between investment and results in the field of research and innovation activities, which also depends on the structure of the economy. Moreover, Slovenia has relatively inefficient tertiary education, which is also insufficiently attuned to demand for graduates in the labour market. Despite efforts to reduce administrative obstacles to the development of entrepreneurship, complex bureaucratic procedures still hamper company creation, business and investments. The relatively rigid labour market legislation is also an obstacle to faster discontinuation of non-performing segments of companies. The high tax burden on labour is an important drag on faster entrepreneurial development, in particular that geared towards creating higher value added per employee, and on the hiring of highly qualified staff. This, coupled with high labour costs associated with the rigidity of labour legislation, is an obstacle not only to faster entrepreneurial development, but also to inflow of foreign direct investment, which, by transferring know-how and technology, can play an important role in raising productivity. An efficient privatisation of the economy has also not been completed, which has hampered the competitiveness of the Slovenian economy by undermining the efficiency of corporate governance. While having a positive role in encouraging the development of companies with good prospects, the banking system has also held back restructuring and development to a certain extent: in the period of high economic activity, it acted very pro-cyclically, supporting the allocation of financing even to less productive investments. Its competitiveness having deteriorated, the Slovenian economy has been forced to cope with the crisis against the backdrop of limited sources of financing and a severe deterioration of public finances, which has additionally narrowed the prospects for faster recovery. Given the relatively rapid growth in labour costs in 2008 and 2010, and a severe decline in productivity in 2009, the cost competitiveness of the Slovenian economy deteriorated significantly compared with the EU average in the last three-year period (2008-2010). This has led to a strong drop in the relative profitability of the Slovenian economy, which had been the highest in the euro area, and consequently narrowed the prospects of recovery with internal resources much more than in other countries. Moreover, faced with high indebtedness, inefficient domestic financial markets and poor access to international markets, companies are having trouble securing financing. Companies are also coping with a high payment default risk and, in recent times, increased inflationary pressure stemming from increased prices of raw materials and energy on world markets. In the period of economic crisis, Slovenia's position on the international goods market also deteriorated, as it slipped from the group of countries with above-average growth to the group of countries with above-average drop in market share. The economic crisis also upset some macroeconomic balances, especially in public finances, where major shifts towards fiscal consolidation have yet to be seen. Restrictions on general government spending were based principally on emergency restraint of growth in wages and social transfers, and cuts in capital and capital transfers, and these have been additional factors holding back already weak domestic demand. Insufficient action to consolidate public finances has adversely affected the perception of Slovenia in international financial markets, which could further restrict access to financing for the general government and, by extension, the private sector, and increase debt-servicing costs. With rising age-related expenditure, it could also reduce future potential for growth. There was little progress in 2009 and 2010 on achieving the social goal of SDS - sustainable improvement of well-being and quality of life. The economic crisis and consequent deterioration of the labour market reduced employment and increased unemployment in both years, which was coupled with accelerated retirement due to demographic trends and the expected pension reform. The number of wage earners dropped and the number of those whose income was replaced by social transfers rose. In 2009, disposable income dropped in real terms for the first time since 1996, when it was first measured, and the share of social transfers increased significantly. Household expenditure also dropped in 2009. Disposable income inched up in 2010 according to our estimates, while growth in household expenditure was subdued. As the ranks of recipients of social transfers swelled, the share of expenditure on social protection relative to GDP increased substantially, according to our estimates. While the standard of living deteriorated, available indicators for 2009 show that wage and income inequality did not increase, and nor did the risk of poverty. The former is largely a consequence of structural changes in employment (removal of low-wage jobs with low educational requirements), whereas the still low at-risk-of-poverty rate may be attributed to the effect of social transfers (which reduce the risk of poverty by more than half in Slovenia). The deterioration of the labour market was mitigated by government measures to preserve jobs and a significant increase in the scope of the active employment policy. The substantial rise in the minimum wage in 2010 improved the position of earners of the lowest wages and increased average pay. However, since this was one of the factors that also had an adverse impact on competitiveness and unemployment by increasing labour costs, we estimate that its overall effect on the welfare of the population was not as positive. In the area of social protection, several key systemic changes were enacted in 2010 after years of preparation, while some are still in the preparatory phase. Parliament passed new pension legislation designed to keep spending on pensions as a share of GDP largely unchanged over the next 15 years. Legislation on cash benefits for people in financial distress was also changed to make aid to the poor more efficient. New legislation on the labour market raised unemployment benefits and made it easier for young people to qualify for benefits. However, other legislation on social protection which would address the financing of health care and long-term care in accordance with demands for better accessibility and an appropriate ratio between an acceptable share of public expenditure and the scope of the service is still being drafted. Immediate implementation of systemic changes is urgent, as the difficulties that public funds were faced with in covering expenditure were aggravated in 2009 and 2010 by a lack of systemic changes, and thus had to be addressed with non-systemic (emergency) measures, which will only postpone problems. Pressure on the environment abated as the economic crisis escalated, which is a step towards the sustainable and intergenerational goal of SDS. However, this does not constitute a permanent reduction of pressure on the environment, which remains a challenge, in particular in the light of efforts to achieve EU environmental goals up to 2020. Greenhouse-gas emissions, having been increasing until 2008, dropped substantially in 2009 bringing Slovenia closer to the Kyoto target (for 2012). However, the emission intensity of the economy (emissions per unit of GDP) did not drop, even though this is necessary in the long term to reduce emissions. Against the backdrop of the economic crisis and the slowdown of international trade flows, lower energy use in transport, the sector which accounted for the biggest share of emissions increases during the economic upswing, contributed most to the fall in overall emissions. We estimate that the significant rise in excise duties in 2009 also contributed to a decline in sales of energy products and lower energy consumption in transport, but the impact of this factor was smaller than the effect of the economic crisis. It was largely due to lower energy consumption in transport that the energy intensity of the economy dropped in 2009, but it remained at the relatively high level recorded in 2007, and above the EU average. With high levels of hydroelectric power production (due to favourable hydrological conditions) and low overall energy consumption, use of renewables rose substantially in 2009, but this continues to depend largely on hydroelectric power production; we estimate that in 2010 the share of renewables once more fell (as energy consumption rose due to stronger economic activity). Slovenia did achieve the renewables target of the National Energy Programme in 2010, but significant progress is required in the next decade to achieve the targets in the EU strategic guidelines, in particular in the use of other renewable sources that are still relatively underused. There were improvements in waste treatment in 2009, on industrial as well as household waste, but Slovenia still lags far behind the EU average on treatment of household waste. Meeting Slovenia's development goal in the international environment - to become an internationally distinctive and established country - is mainly associated with Slovenia's integration in major international organisations over the last few years. Because of the lack of appropriate internationally comparable indicators, the implementation of this objective cannot be measured in the same way as the other three objectives, but we estimate that Slovenia's international recognition has increased with its integration and active involvement in international organisations. In 2004, Slovenia had become a member of the EU and NATO, and three years after its accession to the EU, it joined the Economic and Monetary Union (EMU). Since July 2010, it has also been a member of the Organisation for Economic Co-operation and Development (OECD), which unites the most economically developed countries in the world. Slovenia's recognition and reputation in the world was also significantly affected by its active involvement in international organisations. In the period of crisis, the Slovenian Government adopted measures to mitigate the impact of the downturn, to exit the crisis and to improve the competitiveness of the economy, which have been only partially executed (in part due to the relatively short period of implementation), and it launched preparations for a new development strategy up to2020. Having adopted measures to cushion the crisis in 2009 (in particular in the labour market), at the beginning of 2010 the government put in place a set of measures aimed at boosting economic activity and gradually tackling macroeconomic imbalances. The labour-market measures were mostly implemented, but consolidation of public finances, which has been slower than expected, remains the biggest problem in terms of exiting the crisis. At the beginning of 2011 the government responded to the slow economic recovery and the decline in competitiveness with the adoption of measures to improve competitiveness. It also adopted Slovenia's commitments for improvement of competitiveness as part of the Pact for the Euro. The measures adopted in the midst of the crisis mostly address areas defined in Slovenia's Development Strategy, which sets out key development goals up to 2013. The government has also launched preparations for a new development strategy, which will address the altered circumstances in Slovenian society and the international environment and lay out the key policy goals and guidelines up to 2020. Slovenia's key challenge in the coming years will be to achieve sustainable economic growth with a view to increasing the well-being of the population. To achieve sustainable economic progress and create jobs, addressing the situation in the financial sector and balancing the public finances must be coupled with a redoubling of efforts to improve competitiveness. In view of the shortcomings of economic development in the past, policy measures must focus on increasing the value added of products and services, improving productivity and raising the proportion of activities with higher value added per employee. To achieve that, it is vital to strengthen innovation, improve the efficiency of knowledge transfer and education, improve the educational attainment and skills of the working-age population, provide an efficient regulatory environment for business, reduce administrative obstacles, improve labour-market flexibility and boost the efficiency of competition protection, in particular in regulated sectors, such as network industries. Competitiveness is also being hindered by reduced levels of trust in the rule of law. The efficiency of the judicial system and of the legal framework will have to be improved to increase business efficiency and make corporate governance more efficient. In an economic crisis, with the collapse of the less competitive parts of the economy and the resulting surge in unemployment, the state must provide conditions to create new jobs, and facilitate the transition from unemployment to employment by supporting reallocation of labour within a flexicurity system (an effective system of life-long learning and active employment-policy programmes). It makes sense to promote particularly employment in sectors in which demand is increasing (e.g. ageing-related services, green jobs), while new models of cooperation between the private and the public sectors are also required. High employment, which provides economic independence and social inclusion, is a key element of well-being. Another key area in terms of securing prosperity is the systems of social protection: pension legislation has already been changed, but legislation on health care and long-term care is yet to be adapted to comply with the demand for greater accessibility of service without jeopardising the stability of the public finances. Another major challenge that Slovenia must face effectively in the coming years is achievement of key strategic goals with minimum pressure on the environment. To halt the exertion of ever greater pressure on the environment with economic development, efforts must be targeted towards reducing the energy intensity of the economy, in particular by reducing emissions from transport, improving energy efficiency and increasing the use of renewables. 1. A competitive economy and faster economic growth SDS guidelines: A competitive economy and faster economic growth is one of the five development priorities of SDS, and encompasses the following objectives: ensuring macroeconomic stability,1 promoting entrepreneurial development and increasing competitiveness, and increasing the competitiveness of services. The first objective, ensuring macroeconomic stability, focuses on three core tasks: increasing the adaptability of fiscal and income policies, ensuring the long-term sustainability of public finances, and maintaining price stability. The second objective, increasing competitiveness and promoting entrepreneurial development, focuses on the development of areas in which Slovenia has a competitive advantage, encouraging entrepreneurship and development of SMEs, promoting and developing an innovative environment and a culture of innovation, and supporting internationalisation and competition in the network-industries market. The third objective, increasing the competitiveness of services, prioritises boosting the factors of effectiveness in services and simplifying the administrative framework for their provision. Special emphasis is placed on those services most closely linked to business operations (business, financial, distributive and infrastructural services) because these have the greatest impact on the economy's productivity and competitiveness. 1 Concrete SDS objectives in this area are successful participation in ERM II and adoption of the euro, which was achieved by Slovenia in 2007. Since Slovenia's entry to EMU, it has therefore been more sensible to set the preservation of macroeconomic stability as the primary goal. During the economic crisis, Slovenia's per capita GDP fell significantly compared with the EU average. According to the latest Eurostat data, in 2009 Slovenia's per capita GDP at purchasing-power parity stood at 88% of the EU average, down 3 p.p. over the year before and only marginally above the level when SDS was adopted in 2005 (87%). We estimate that the gap will have widened in 2010 (for which Eurostat data are not yet available), as the recovery was weaker than in the EU. The widening of the gap in the last two years is largely a consequence of the fact that the acceleration of economic activity in the years preceding the crisis (2006-2008), achieved in a good international economic environment, easy access to financing on international markets and high public investment in infrastructure, was insufficiently based on structural changes and improvements in qualitative factors of competitiveness. Thus, in the good years, changes in the economic and corporate structure towards high-technology industries and intensive use of knowledge were modest. In the period of crisis, Slovenia thus faces a relatively severe deterioration in competitiveness and consequently a slow recovery after a savage initial contraction. Given the structural weaknesses, the economic crisis also disrupted certain macroeconomic balances, especially in public finances. Inflation pressure has also been increasing again. Moreover, faced with high indebtedness, inefficient domestic financial markets and poor access to international financial markets, companies are having trouble securing financing. Increasing payment default risk is also a cause for concern. A return to the path of converging with the EU level of economic development requires action to address problems in the financial sector and consolidation of public finances, but, in particular, focusing all efforts on improving competitiveness. In view of the shortcomings of economic development in the past, policy measures must target productivity and increasing the share of activities with higher value added per employee. To achieve this, it is vital to strengthen innovation, improve the efficiency and effectiveness of the transfer of knowledge, improve educational attainment and skills of the working-age population, provide an efficient regulatory environment for business, reduce administrative barriers, improve labour-market flexibility and boost the efficiency of competition protection, in particular in regulated sectors such as network industries. Competitiveness is also hampered by the slow resolution of commercial disputes in courts. In future, the efficiency of the judicial system and of the legal framework will need to be improved to increase business efficiency and make corporate governance more efficient. 1.1. Macroeconomic stability Driven by stronger foreign demand and with a relative high contribution of inventory changes, GDP rose by 1.2% in 2010. Positive signals of an upswing of economic activity started to appear in the second half of 2009, when foreign demand picked up, and strengthened through 2010. Export growth was underpinned by high-technology products. The recovery was driven by growth of the main trading partners in the EU, but these impulses subsided in the second half of the year when growth in these countries slowed asthe growth in world trade decelerated, temporary incentives tailed off and austerity measures began to curb general government deficits. Growth of exports to non-EU countries was slower as exports to the markets of the former Yugoslavia continued to drop in real terms. The regional structure of Slovenian exports, with the markets of the former Yugoslavia accounting for a high share of non-EU exports, was, in addition to the unfavourable technological structure of Slovenian exports, a factor behind the slower growth in exports compared with some other EU countries. The recovery was held back in particular by domestic factors. Domestic consumption exceeded the 2009 level by only 0.4%, with construction investment in particular well behind the level of 2009. Construction, which had grown at above-average rates in the past, saw another severe contraction (dropping to the level of 2005) having already fallen in 2009. In addition to a decline in orders for all types of construction (residential construction contracted most since the start of the crisis), the situation in construction was additionally aggravated by high indebtedness and problems in the banking sector, which escalated last year.2 According to our estimate, these problems were exerting an increasing drag on the financing of investments in equipment and machinery through the year, although these investments rose 6.8% over the previous year. Following above-average growth in construction in the previous years, which saw it rise to 7.3% of GDP by 2008 (EU: 5.8%), Slovenia experienced one of the most severe contractions in construction in the EU in 2009 and 2010, which was a key factor behind the greater decline in investment compared with the EU and, by extension, the gap in economic recovery. In the euro area, economic growth averaged 1.7% last year (EU: 1.8%). The EU grew at a faster pace than Slovenia due to a faster recovery in exports and a smaller decline in investments, as well as growth in household expenditure. Household consumption did inch up in Slovenia (0.5%) according to revised data, but the current balance of payments for 2009 (for household travels) does not yet represent a real basis for the calculation, as the figures are not yet final. Therefore we estimate that the positive rates of household consumption in 2010 do not mirror an actual strengthening of Slovenian household consumption.3 General government expenditure growth, which was higher than in the EU in 2008 and 2009, dropped to a Figure 1: GDP growth in Slovenia and the euro area by expenditure components, 2010 ■ Change in inventories and valuables ^ Net exports Household consumption ■ General government consumption N Gross fixed capital formation Slovenia -1.0 0.0 1.0 2.0 Contribution to growth, in p.p. similar level to that in the EU (to 0.8%) due to austerity measures. Change in inventories, on the other hand, made a high contribution to GDP growth (1.6 p.p.) as inventories surged following a steep decline in 2009. This contribution from changes in inventories was much bigger than at the EU level. At 1.9%, consumer price growth in 2010 was at a similar level to that in the preceding two years and roughly on a par with the figure for the euro area as a whole. Price growth was subdued across the majority of the index groups, reflecting the overall economic situation.The only outliers were prices of products that depend on increasing global prices of energy and non-energy commodities, and prices of goods that were subjected to tax increases, which had a similar impact on inflation to that in 2009. Whereas higher prices of energy commodities relatively quickly spilled over to retail prices, in part due to the way that retail prices are administered, the even faster growth in global prices of non-energy commodities and food had not spilled over to the same extent by the end of last year. A bigger spillover to retail prices of food began to occur at the beginning of 2011 and had already been indicated by stronger growth of industrial producer prices4 and import prices, the increase in producer prices in the EU having already been higher than in Slovenia at the end of the year. Prices directly administered by the government grew at a subdued pace (0.8%). For the second year in a row, there was growing pressure from increases in the prices of municipal services after responsibility for consent for price rises was devolved to the local level, which is why the government froze these prices at the end of August. A comparison based on the harmonised index of consumer prices shows that inflation in Slovenia and the euro area was 2.2% last year. In Slovenia, as in the euro area, price growth was driven mainly by energy products and taxes; however, the contribution of these factors was higher in Slovenia. The contribution of energy prices (in particular natural gas and district heating) to inflation was higher, as these prices grew marginally faster than in the euro area and their share in the household expenditure structure remains higher. For the second year in a row, excise and other duties also rose faster, contributing 0.6-0.7 p.p. to inflation in Slovenia, compared with approximately 0.3 p.p. in the euro area. Services prices, where the gap to the euro-area average is widest even though they had been growing at a faster rate in recent years, stagnated last year, rising by 0.1%, compared with 1.3% in the euro area as a result of the drop in the price of school meals due to the introduction of subsidies. This factor excluded, services prices would have grown at a similar rate as in the euro area and total consumer-price growth would have been among the highest in the euro area once more. Source: SORS, Ameco. 2 See also chapter 1.3.2. Financial services. 3 This is also indicated by labour-market data on employment and wages, revenue in retail and wholesale trade, and other household consumption indicators for last year. 4 The growth in industrial producer prices was driven by metal products; the manufacture of chemicals and pharmaceutical preparations also recorded relatively high growth rates, with prices of food products also increasing. Euro area -2.0 Figure 2: Contribution of goods and services groups to inflation in Slovenia and the euro area, 2010 Energy Non-energy ndustrial products Non-processed food Processed food, alcohol, tobacco and tobacco products HICP total -0.5 0.0 0.5 1.0 1.5 2.0 2.5 In p.p. Source: Eurostat portal page - Harmonised indices of consumer prices, 2011. In the 2008-2010 period, wage growth was largely determined by the economic crisis and the implementation of wage reform in the public sector. In the second half of 2008, the strengthening of private-sector wage growth seen in previous years was interrupted by the economic crisis, and the attendant deterioration of the business environment and fall in orders. The private sector first reacted by reducing overtime work and shortening working hours, which continued into 2009. Growth in nominal gross wages in the private sector came to an abrupt slowdown in 2009 (from 7.8% to 1.8%); however, since layoffs disproportionately affected those in the lowest income brackets, it was still higher than it would have been had the structure of employment remained unchanged (0.9%). In 2010, gross wages in the private sector strengthened once more (5.2%). Growth was particularly underpinned by the increase in the minimum wage (about 3.0 p.p.), along with the effect of changes in the structure of employment (about 0.5 p.p.), still present last year. In terms of adjustment to economic circumstances, only the levels of Christmas bonuses and 13'h month payments were unexpected in both years, as they were only marginally lower than in 2008. Their size and the share of employees that received these payments were, as always, highest in financial and insurance activities and in industries with a high share of state ownership: electricity and gas supply, water supply and mining. For 2011 and 2012, the government adopted recommendations that performance-related bonuses should not be paid in public undertakings and in those in majority ownership of the state.5 The public sector 5 On 22 July 2010, the government adopted Recommendations on limits for wages and other personal income of employees in public corporations and companies performing general public services. The recommendations are applicable to public undertakings and companies in majority ownership of the state or local communities, their subsidiaries and any further subsidiaries thereof. The recommendations determine did not undertake any adjustment in 2008; compared with the year before, wages grew robustly, outpacing wage growth in the private sector. The onset of the crisis coincided with the beginning of the implementation of the wage reform that had been planned for several years and was intended to iron out wage disparities among occupational groups in the public sector. This resulted in relatively strong growth in public-sector wages just after private-sector wages started to ease. The first two quarters of funds to eliminate wage disparities were thus paid in August 20086 and January 2009, which contributed to high wage growth in 2008 (9.7%), while wage growth in 2009 was already somewhat lower (6.5%) as a result of measures taken during 2009, which stemmed wage growth to a certain extent in 2009, bringing it to a complete halt in 2010 (0.0%).7 Last year's stagnation of wages, which is expected to continue into 2011 according to the agreements reached, will thus have a short-term stabilising impact on public finances. In the long term, however, the agreements did not limit labour cost growth in the public sector: taking into account the possible growth in employment in these activities, they merely postponed it to the coming years, when a considerable rise in public-sector labour costs may be expected once more. Public-sector wage increases will thus continue to fluctuate greatly between 5 that extraordinary performance-related payments (Christmas bonuses, 13th month payments) should not be paid in 2011 and 2012, with the savings allocated for development, and that the annual holiday allowance be capped at the level of the minimum wage.The government called upon management and supervisory boards to act in line with these recommendations. 6 The first quarter was paid in arrears for the period from May 2008. 7 In 2009 and 2010 the government and its social partners signed three agreements, realised with annexes to the Collective Agreement for the Public Sector and the adoption of several acts: the Agreement on Measures Regarding Public-Sector Salaries due to the Changed Macroeconomic Situation in the 2009-2010 period (24 February 2009), the Agreement on Measures Regarding Public-Sector Salaries for the period December 2009-November 2011 (28 October 2009) and the Agreement on Measures Regarding Public-Sector Salaries and Other Compensation for 2011 and 2012 (OG RS no. 89/10); the Act of Intervention Steps because of the Economic Crisis (OG RS no. 98/09), Act on Provisional Reduction of Officials' Salary (OG RS no. 20/09, 13/10), Act of Intervention Steps because of the Economic Crisis (OG RS no. 94/10); Annex No. 1 to the Collective Agreement for the Public Sector (OG RS no 23/09), Annex No. 2 to the Collective Agreement for the Public Sector (OG RS no. 91/09), and Annex No. 4 to the Collective Agreement for the Public Sector (OG RS no. 89/10). These formed the basis for deferral of the disbursement of the remaining third and fourth quarters of funds for the elimination of wage disparities (until the point at which economic growth exceeds 2.5%); workplace promotions to higher wage classes were frozen for a year; the mechanism of wage adjustment for inflation was tightened; the amount of the annual holiday allowance was retained at the 2008 level; the disbursement of regular performance-related payments was temporarily held; payments for increased workload were limited. Had these agreements not been reached, growth in public sector wages in 2009 and 2010 would have been similar to that in 2008. S years. With labour costs expected to increase further in the public sector upon final implementation of the new wage system, the government should adopt more efficient measures to limit growth in employment or reduce employment in the public sector and to adjust public-sector wages to changes in labour productivity. Figure 3: Nominal growth in gross wages per employee and labour productivity ----Gross wage per employee —•— Private sector -Public sector -----Labour productivity a a a a a Source: Si-Stat data portal - Demography and social statistics - Labour market, 2011. Following a severe deterioration of the public finances in 2009, largely due to the impact of the economic crisis, and in part to structural factors, there was no significant improvement in 2010. The general government deficit remained at a high level (5.5% of GDP), only 0.5 p.p. lower than that in 2009, when the deficit surged (by 4.2 p.p. over 2008), indicating no notable shift in consolidation of the public finances.8 Revenue inched up, with its growth and structure mainly following the macroeconomic environment; in the categories of excise duties and corporate income tax, its inflows were also affected by fiscal-policy measures, along with the tax reform in the pre-crisis period. Expenditure also rose marginally in nominal terms, but not as much as revenue. Expenditure categories associated with the rise of debt and deterioration of the labour market (the growing number of unemployed and socially vulnerable persons) recorded the fastest growth rates. Contrary to the measures envisaged in the Stability Programme - Update 2009 and the Exit Strategy, compensation of employees did not decline last year, whereas expenditure on capital and capital transfers did.9 Given the only partial implementation of measures to curb expenditure growth, this change in structure highlights 8 The supplementary budget for 2010, adopted in June 2010, merely adjusted expenditure to the projected lower revenue and did not contribute to the consolidation of public finances last year. 9 See chapter 3.1 Quality of public finances the fact that the modest rise in expenditure in 2010 was partially driven by the crowding out of relatively flexible expenditure types by growing interest payments, which is not in line with the developmental role of public finances. Amid these movements in the public finances, in 2010 the general government deficit was slightly below the level envisaged in the Stability Programme, but, given the Ministry of Finance forecast in the official release of data as part of the excessive deficit procedure, the deficit this year will already be 1.3 p.p. of GDP higher than foreseen in the Stability Programme - 2009 Update. According to our estimates, the deviation of nominal amounts is greater in revenues, particularly inflows of EU funds, which shows that absorption capacity has not yet increased as planned, despite the improvement. Public spending should be more controlled in the years to come as a result of the fiscal rule,10 which anticipates modest growth in public spending. A more development-oriented structure of expenditure will be facilitated through effective development planning, which is also foreseen by the Decree on the Documents of Development Planning Bases and Procedures for the Preparation of the Central Government Budget. This would establish a closer link between development priorities and related programmes and enable the ongoing exclusion of inefficient (and the reform of insufficiently efficient) development programmes. The slower-than-expected consolidation in this year and the next has probably contributed to slightly higher cost of borrowing in early 2011, and also affected the downgrade of future prospects in Slovenia's credit rating from "stable" to "negative" (Standard & Poor's, December 2010). Consolidation of the public finances should therefore be a priority if Slovenia is to create a stable macroeconomic framework and prevent a worsening of its perception by financial markets. Deficit-busting measures must be implemented and executed immediately, especially structural measures that will reduce the deficit in a sustainable way. Sustainable consolidation also crucially depends on the immediate implementation of pension reform considering the pressure on ageing-related expenditure exerted by demographic trends. Consolidation is also needed in view of the extensive scope of state guarantees, which represent a contingent liability and a risk that debt will surge. In the last two years, general government debt as a share of GDP rose by just over 15 p.p. and publicly guaranteed debt by 9 p.p. Having soared in 2009 on the back of a surging deficit and front-loaded borrowing for the financing of the 2010 deficit, debt growth slowed down in 2010, but it nevertheless stood at 38.0% of GDP at the end of the year, up 16.1 p.p. from 2008. Although Slovenia still ranks among countries with a relatively low public debt as a share of GDP, it has been nearing the 10 Based on the Decree on the Documents of Development Planning Bases and Procedures for the Preparation of the Central Government Budget (OG RS, No. 54/2010). EU average in terms of relative increase in debt in the past two years. Borrowing conditions (yield on 10-year bonds) in the first half of 2010 were more favourable than in 2009, but worse than in the period preceding the crisis. The spread on German reference bonds began to widen in the second half of 2010 as the euro-area debt crisis escalated, but it was still substantially narrower than on the bonds of high-risk members of the euro area. Following a significant increase in 2009,11 the growth of publicly guaranteed debt continued last year, albeit at a more moderate pace; at the end of the year it totalled EUR 7.7 bn or 21.5% of GDP. Even though state guarantees do not directly increase general government debt until they are called up, their scope and the estimate of the probability of them being called up can affect how a country is perceived by financial markets, and make borrowing more expensive by widening spreads. It is therefore all the more important to preserve the country's credit rating at the current level by honouring commitments made regarding consolidating public finances and introducing systemic changes vital to the long-term sustainability of public finances. The quality and transparency of public finances statistics will also need to improve with the adaptation of statistics to international methodologies. The substantial drop in the current-account deficit since the onset of the crisis has been driven mainly by economic activity, but in the last two years absorption of EU funds also improved significantly. The current-account deficit dropped further (to 1.1% of GDP) in 2010 following a steep decrease in 2009 (from 6.7% to 1.5% of GDP). The decline in 2009 was based largely on a lower goods deficit, which expanded marginally in 2010 as the terms of trade deteriorated. Last year's decrease in the current-account deficit was a consequence of a continued narrowing of the deficit in investment income. In 2009, the investment income deficit decreased due to a strong decline in net payment of interest on external debt, following the deleveraging of commercial banks and a drop in interest rates; last year, the drop was a consequence of lower net outflows from the equity capital of foreign direct investments as Slovenian companies abroad are estimated12 to have recorded lower outflows from reinvested earnings than in 2009. Net interest payments were also lower in the year as a whole, but they rose in the second half of the year and began to exceed the levels of 2009. The decline in net interest payments by commercial banks thus eased 11 Largely on account of guarantees in the amount of EUR 2 bn that the state granted to domestic banks for borrowing (see also Development Report 2010, 2010). 12 Current balance of payments data on reinvested earnings are estimated by the Bank of Slovenia based on multi-year averages; the actual data will be included in the balance of payments when companies' annual balance sheets for last year are available. We estimate that the actual data for 2010 will not show such a high net outflow of capital from reinvested earnings as in 2009 (EUR 335 m), when it was a consequence of disinvestment by Slovenian companies abroad. off and the net interest payments on treasury bonds and bills rose due to the maturity dynamics. In the last two years, the drawing of funds from the EU budget improved markedly, which turned the current transfer deficit to a surplus for the first time in five years in 2010. Better drawing of cohesion funds was the biggest factor behind the improvement in the net position with respect to the EU budget (to EUR 155.6 m) in 2009; in 2010, the net position improved further (EUR 326.4 m) largely due to increased drawing from the Regional Development Fund for the Strengthening of Regional Development Potentials of Infrastructure, and funds for development of human resources from the European Social Fund. The surplus in services trade continued to narrow last year as the deficit in the trade of licences, patents and copyright expanded further. Following brisk growth in 2007 and 2008, the increase in gross external debt slowed in the last two years, while the debt structure shows that public and publicly guaranteed debt as a share of overall debt has been increasing. Slovenia's gross external debt reached EUR 40.9 bn at the end of 2010, up EUR 0.6 bn over December 2009. Debt growth eased off further compared with 2009, when debt rose by EUR 1 bn after rising very rapidly in 2007 and 2008 (by EUR 10 bn and EUR 4.5 bn respectively). In the period of fast growth, the increase had been mainly due to borrowing by commercial banks, which, however, deleveraged substantially in the last two years due to loan maturity dynamics and problems with access to new sources of financing. Much as in 2009, borrowing by the state to cover the rising public deficit and pay off debt13 accounted for the bulk of the increase in gross external debt in 2010. Slovenia has a steady pace of debt maturity without larger concentrations in any particular year, which means that refinancing risk is equally distributed. Last year, debt guaranteed by the state continued to rise. In 2009, publicly guaranteed debt was driven mainly by guarantees for the issue of two bonds by commercial banks; last year's increase in publicly guaranteed debt largely originated from borrowing by legal and natural persons granted guarantees under acts on guarantee schemes. Borrowing with state guarantees gave banks access to financing on international markets, which had been very limited after the onset of the crisis. Rapid growth in public and publicly guaranteed debt in the last two years, coupled with deleveraging of the private sector, increased its share in overall debt last year to the highest level so far (40.3%). Total gross external debt relative to GDP, however, remained well below the euro-area average. At the end of 2010, it stood at 113.4% of GDP, whereas in the euro area it was already at 205.3% of GDP in 2009. Nevertheless, this comparison alone is not sufficient to assess potential debt-servicing risks: external debt needs to be evaluated in the broader context of a country's macroeconomic environment and factors such as potential growth, debt structure, interest on loans, 13 See also the paragraph on general government debt in this chapter. concentration of payments by years etc. Indeed, against the backdrop of the overall economic environment, the situation in some heavily indebted sectors (e.g. construction, retail and wholesale trade) tightened in the past year and is already affecting companies' debt-servicing ability. Since banks are heavily exposed to these sectors, the situation is having a negative impact on the crediting of the entire economy. Figure 4: Public and publicly guaranteed debt as a share of total gross external debt, Slovenia growth was weaker than in the EU. The decline in cost competitiveness in the period of crisis had an adverse impact on the profitability of the economy, which fell at the fastest rate among the euro-area countries (see Figure 6). As a result, the prospects of Slovenian companies to recover using their own resources declined more than in other euro-area countries. Figure 5: Real unit labour costs and components, Slovenia and EU average, year-on-year RULC Slovenia RULC EU —*— Productivity Slovenia --•-- Productivity EU —0— Employee compensation Slovenia --0-- Employee compensation EU 3 1995 2000 2005 2006 Source: Bulletin of the Bank of Slovenia, 2011. 2007 2008 2009 2010 0 I -3 -9 : : . c^ c^ Source:SI-STAT - Economy, 2011; Eurostat portal page - Economy and Finance, 2011. 1.2. Increasing competitiveness and promoting entrepreneurial activity The cost competitiveness of the Slovenian economy deteriorated rapidly in 2008 and 2008, while the improvement in 2010 was more subdued than in much of the EU. The stable improvement in cost competitiveness in the first years of SDS implementation had already started to deteriorate before the onset of the economic crisis, when growth in unit labour costs outpaced that in the EU in 2008 due to relatively high wage growth (in the private and public sectors). Cost competitiveness continued to decline in 2009. Economic activity contracted at twice the rate of the EU average, resulting in a sharp drop in productivity, which led to a growth in unit labour costs that significantly exceeded the EU average once more. In 2010, unit labour costs dropped on the back of renewed productivity growth, but the decrease was among the lowest in the EU as labour costs outpaced the EU average due to the rise in the minimum wage. Last year, the improvement in productivity was bigger than in the EU, but this was largely due to the low basis of comparison in the preceding year. To a larger extent than in the EU, productivity gains in Slovenia were underpinned by lower employment, whereas economic Figure 6: Relative profitability* (compared with trading partners), Slovenia, euro-area members 5 Source: ECB Portal Page, 2011; IMAD calculations. Note: * Relative profitability is calculated as the ratio between the relative GDP deflator and relative unit labour costs. During the crisis, Slovenia slid from the group of countries with above-average growth in market share to the group with above-average decline in export competitiveness. In the period 2000-2007, Slovenia was in the group of EU 6 -6 5% 0% countries with relatively rapid growth of global market share, although the pace was slower than in the majority of other new Member States. With the escalation of the economic crisis, however, Slovenia's global market share began to drop. Initially, in the period 2008-2009, the loss of foreign markets was relatively moderate: in 2009, a large increase in exports of road vehicles to the EU (in particular to France and Germany), buoyed by car purchase subsidies in some Member States, largely offset the decline in market shares of electrical machinery, apparatus and appliances and machinery specialised for particular industries in the machinery and equipment product group, which is relatively important in terms of volume for Slovenian exports. Moreover, Slovenia's market share in the equally important group of chemical products continued to expand, even as the market share of medicinal and pharmaceutical products shrank. Despite a small drop in market share in 2008 and 2009, Slovenia's position in the EU deteriorated, as it was among those Member States with above-average contractions of market share.14 In 2010, as car-purchase subsidies in the EU were phased out, the market share of road vehicles dropped, as did the market shares of other products that are important for Slovenian exports (in particular medicinal and pharmaceutical products, electrical machinery, apparatus and appliances).15 The deterioration of Slovenia's position on the global market in 2010 was thus more pronounced than in previous years, but it was on a par with the average decline in EU Member Sates' market shares. In 2010, as throughout the crisis, the decline in Slovenia's market share was bigger on non-EU markets, as the economies of the former Yugoslavia, which account for a significant proportion of Slovenian exports, were yet to begin their recovery. Improving competitiveness hinges on restructuring the economy towards creating higher value added per employee (productivity), an area in which progress has been insufficient since the start of implementation of SDS. Decomposition of per capita GDP (to productivity and employment rate) indicates that Slovenia lags behind the EU average because of lower productivity (82.4% of the EU average in 2009), the area in which progress was slowest between 2005 (the beginning of implementation of SDS) and the onset of the crisis (2008). Employment, meanwhile, increased at a rate significantly higher than in the EU; by 2009, Slovenia had already exceeded the EU average by almost 7%.16 The sluggish improvement in competitiveness in recent years was the consequence of insufficient changes in the structure of the economy towards enhancing high-tech and knowledge-based industries, and an insufficient overall increase in productivity across all industries. In the period 2005- 14 Over a third of EU countries increased their market shares in the period 2008-2009, including the majority of the new Member States. 15 Provisional data according to the SICT are for the first nine months of 2010 and only available for the EU market. 16 Employment relative to the entire population (all age groups). 2008, when economic growth was brisk, construction and certain service industries accounted for the bulk of productivity gains due to changes in the structure of the economy (intersectoral effect). In this period, the contribution of structural changes to productivity growth was also relatively small in manufacturing, where the largest contribution to the structural component of productivity growth came from growth in the technologically less demanding manufacture of basic metals and fabricated metal products, as this activity gained by far the greatest importance in the structure of manufacturing (see Table 1). The shares of other technologically less demanding activities decreased marginally, except for food and textile industries, which recorded bigger drops. Among technologically more demanding activities, only two medium-tech industries saw increases in the structure of total manufacturing value added (manufacture of machinery and manufacture of transport equipment), while the shares of the chemical and electrical industries, which include the majority of high-tech manufacturing, remained flat. Despite having improved in good economic times, the potential for intrasectoral productivity growth of manufacturing industries remains high, in particular in high-tech industries. In 2009, two of the three manufacturing industries with the biggest productivity gap to the EU were high-tech industries (electrical and machinery industries), and both are among the industries that have made the smallest gains in bridging the gap to the EU average since 2005.17 Figure 7: Breakdown of per capita GDP at purchasing-power standards, Slovenia, EU27=100 Employment rate "h Productivity iGDP pc in PPS 2005 2006 2007 2008 2009 Source: Eurostat Portal Page - National Accounts (2011); IMAD calculations. 17 In 2008 industries with the biggest productivity gap to the EU included the medium-tech manufacture of vehicles and boats, which made significant headway in 2009, buoyed by car-purchase subsidies in some EU Member States. 0 90 80 70 60 50 Table 1: Breakdown of productivity growth in manufacturing and contribution of individual industries to components of productivity growth in manufacturing, Slovenia 2005-2008 2008-2009 Intersectoral component* in p.p. Intrasectoral component** in p.p. Productivity in % Intersectoral component* in p.p. Intrasectoral component** in p.p. Productivity in % Manufacturing 0.54 5.32 5.86 1.00 -9.10 -8.10 Contribution of individual industries to components of productivity growth in manufacturing, in p.p. DA Manufacture of food -0.34 0.35 0.01 0.33 -0.05 0.28 DB Manufacture of textiles -0.43 0.49 0.06 -0.40 -0.44 -0.83 DC Manufacture of leather -0.09 0.00 -0.09 -0.11 0.09 -0.03 DD Manufacture of wood -0.03 0.28 0.25 -0.10 -0.50 -0.60 DE Manufacture of paper -0.09 0.36 0.26 0.37 -0.08 0.30 DF Manufacture of coke 0.00 0.00 0.00 0.00 0.00 0.00 DG Manufacture of chemicals 0.02 0.95 0.97 0.85 -0.85 -0.01 DH Manufacture of rubber 0.14 0.11 0.25 0.18 -0.80 -0.62 DI Manufacture of non-metal mineral products -0.02 0.23 0.22 -0.07 -0.98 -1.05 DJ Manufacture of basic metals 0.82 0.52 1.34 0.07 -1.47 -1.40 DK Manufacture of machinery 0.35 0.52 0.87 0.03 -1.46 -1.43 DL Manufacture of electrical equip. -0.05 1.05 1.01 0.02 -1.63 -1.61 DM Manufacture of transport equip. 0.32 0.26 0.58 -0.15 0.09 -0.06 DN Manufacturing n.e.c. -0.04 0.18 0.14 -0.02 -1.00 -1.03 Source: SI-STAT - Economy - National Accounts (2011); IMAD calculations. Notes: ^Increase of productivity due to reallocation of production resources from low-productivity to high-productivity industries and to industries with high productivity growth. **Increase in productivity that would have been achieved if the employment structure had remained at the reference-year level. Productivity measured with value added per employee at constant prices. The structure of goods exports in terms of technological intensity was improving only moderately until 2008, whereas the more intensive changes during the crisis are mostly a result of passive restructuring. The economic crisis and attendant decline in less-competitive parts of the economy resulted in changes in the structure of the economy and goods exports in 2009 (passive restructuring), but this was insufficient for a significant improvement in competitiveness. Given the modest structural changes in previous years, Slovenia's structural gap to the EU average in terms of technological intensity of exports remained high.18 Compared with the average of the 12 new Member States, which are increasingly important competitors on the European market, the gap was actually widening until 2009. Slovakia and the Czech Republic19 in particular saw significant changes in the structure of goods exports (see Figure 8) and rapid productivity growth, with manufacturing industries in both countries converging with the EU average faster than that of Slovenia. Moreover, in the past decade Slovenia also lagged behind these countries in terms of productivity growth in the most technologically intensive industries (OECD Economic Surveys, Slovenia, 2011). 18 See indicator Structure of merchandise exports according to factor intensity. 19 In Hungary, the share of high-tech product in good exports had already been very high (in excess of 30%) at the beginning of the previous decade (Slovenia in 2009: 21.1%, Czech Republic: 23.1%; Slovakia: 26.4%) and fluctuated between 30% and 37% in the period 2000-2009.je nihal med 30 % in 37 %). Figure 8: Share of high-tech products* in goods exports of Slovenia, the Czech Republic, Hungary and Slovakia 40 Slovenia Czech Republic Slovakia Hungary Source: Handbook of Statistics 2007-2008 (United Nations), 2007; United Nations Commodity Trade Statistics Database, 2010; own calculations. Note: * According to United Nations methodology (Trade and Development Report, 2002). The significant decline in the level of internationalisation of the Slovenian economy in the first year of the crisis (2009) was followed in 2010 by a gradual increase in the openness of the economy to external trade and an upswing in the traditionally low level of inward foreign direct investment (FDI). The increase in external trade as a share of GDP in 2010, albeit to a level still below that before the crisis, was a consequence of a recovery in foreign demand, whereas domestic demand continued to contract. Openness to external trade increased at a rate just slightly above the average in the EU, where the relative volume of trade (exports and imports) had contracted at a much slower pace than in Slovenia in 2009. Compared with small Member States, Slovenia's external trade as a share of GDP increased at a more moderate pace despite a bigger decline in the previous year. In 2009, the economic crisis had a strong adverse impact on inward and outward FDI stock, as inward FDI flows were negative for the first time in Slovenia's history and outward FDI flows dropped to only 13% of the level recorded in 2008. Given the severe drop in GDP, the relative decrease in internationalisation measured by FDI was relatively small, but this did not change the fact that the relative importance of FDI is significantly lower than in the vast majority of EU Member States. FDI flows and changes in FDI stock in 2010, in particular positive inward FDI flows indicate a gradual recovery and a renewed increase in FDI. In 2010, FDI inflows were largely the result of a process that marked a complete reversal from 2009, as they were based on increased crediting of Slovenian subsidiaries by foreign parent companies and higher reinvestment of profits. This indicates that the confidence of foreign parent companies in Slovenian subsidiaries is gradually recovering. A survey of foreign subsidiaries in Slovenia shows a similar picture: a full 79% of respondents forecast an improvement in sales in 2011 and 67% also forecast bigger payrolls (IER-JAPTI, 2010). Despite the positive signals, however, FDI stock in Slovenia is too low to have a significant contribution to restructuring and improving the competitiveness of the Slovenian economy. The creation of new companies, which accelerated in the period of economic growth, was far less intensive during the crisis as business opportunities dried up. Following a period of growth in 2005-2008, early-stage entrepreneurial activity,20 which measures the share of the population entering entrepreneurial activity, dropped to roughly the level of 2006 in 2009 and 2010. In both years, the share of nascent entrepreneurs, those setting up a business or owning a business for less than three months, declined most sharply. The decline in the share of nascent entrepreneurs is associated with the economic crisis: data show a considerable fall in opportunity-driven early-stage entrepreneurial activity, which had been the main factor of the increase in early-stage entrepreneurial activity during the period of economic growth. Since 2008, the share of new businesses (between 3 and 42 months) has meanwhile remained at a level significantly above the average of the previous three-year period (2005-2007). The higher share of new entrepreneurs is encouraging, since it means that after a period in which a higher number of nascent businesses were established at the peak of the economic cycle, in recent years the share of those persisting on the market for over three months has also increased. Before the economic crisis, early-stage entrepreneurial activity in Slovenia exceeded the average in the EU countries for which data are available. The drop in the last two years brought it down to the average of these countries. However, in the last year, opportunity-driven entrepreneurial activity accelerated in the majority of EU countries, while in Slovenia only necessity-driven entrepreneurial activity inched up; to a certain extent, this can be attributed to the subsidising of self-employment in the period of the crisis.21 Table 2: Slovenia's ranking on World Bank Ease of Doing Business index Rank 2010 Rank 2011 Change 2010/2011 Rank 2010 Rank 2011 Change 2010/2011 Among all (183) countries Among EU countries Ease of doing business 43 42 +1 18 17 +1 Starting a business 25 28 -3 5 6 -1 Dealing with construction permits 63 63 0 16 16 0 Registering property 109 97 +12 23 22 +1 Getting credit 109 116 -7 25 25 0 Protecting investors 20 20 0 4 4 0 Paying taxes 81 80 +1 18 17 +1 Trading across borders 86 56 +30 24 20 +4 Enforcing contracts 60 60 0 19 19 0 Closing a business 40 38 +2 16 16 0 Source: : Doing Business, World Bank, 2010 Note: The ranking includes 183 countries. Due to a change in methodology this year's rank can only be compared to last year's. The survey includes 26 EU Member States (all except Malta). 20 Data are taken from the Global Entrepreneurship Monitor (GEM) survey. For detailed explanations, see indicator Entrepreneurial activity. 21 See indicator Entrepreneurial activity. Slovenia urgently needs to restructure its economy and improve competitiveness. It is therefore paramount to promote the creation of new businesses, especially technological and non-technological businesses based on innovative ideas. In addition to creating an environment conducive to the development of innovation, it is necessary to improve the regulatory environment for business. According to a survey of the business climate in Slovenia (Intrastat, 2011), in addition to factors associated with the economic crisis (payment default risk and declining sales), problems originating from tax policy and bureaucracy have for years been key obstacles to doing business. The many obstacles to doing business are also highlighted by international competitiveness indicators (WEF, IMD), which along with complex bureaucratic procedures and taxation single out the rigidity of the labour market and poor access to financing. According to the World Bank survey on the ease of doing business, Slovenia has made headway in recent years on ease of establishing businesses, but too little has been done to support the functioning of established businesses. The introduction of the e-VEM one-stop shop for all companies in 2008 significantly reduced administrative barriers, and made it easier and quicker to set up a business (the time it takes to set up a business was reduced to only 3 days, with only two procedures required), but prospective entrepreneurs still face significant administrative barriers and lengthy procedures for acquiring additional permits and licences to carry out individual regulated activities.22 Other improvements include shorter and easier procedures for acquiring building permits and registration of real estate, mostly as a result of the launch of a real-estate register in 2008 and accelerated computerisation of the land registry. However, Slovenia's ranking remains low, with the survey (much like the WEF survey) establishing that inefficient state bureaucracy represents an important obstacle to doing business. Doing business now requires fewer procedures than a few years previously, which has also reduced direct costs. Easing the administrative burden on businesses and simplifying the business environment also depend on the implementation of the programme of measures aimed at reducing the administrative burden,23 but the long procedures required to obtain documentation and permits remain a problem. Last year, the main obstacle to doing business was limited access to financing, as the crisis severely restricted the availability and increased the cost of operating assets (loans and debt financing). 1.3. Increasing the competitiveness of services Restructuring of the economy towards expansion of services with high value added has been too slow to meet the SDS objective; however, as the economic crisis disproportionately affected non-service sectors, services as a share of the overall economy swelled. The relative scope of services (G-P) remained practically unchanged in the period 2005-2008 (around 63% of value added), but in 2009 it grew to 66.5% as construction and manufacturing experienced a severe contraction. Although this is close to the SDS target for 2013 (67%), the big increase is to a certain extent transitory, as non-services are expected to rebound at a relatively brisk pace when the economy recovers. Slovenia's gap to the EU average in terms of the share of services in the structure of value added was still almost 8 p.p. in 2009; what is more, throughout the period of implementation of SDS, structural differences relative to the EU remained virtually unchanged. What mostly sets Slovenia apart from the EU average is the significantly lower share of market services, in particular knowledge-based services (business, telecommunications, finance) and a higher share of traditional services (retail and wholesale trade, hotels and restaurants, transport). Slovenia also has a marginally lower share of public services, where it diverges from the EU average particularly due to poor development of the provision of certain services (in particular in health and social work) outside the government sector.24 Table 3: Difference between Slovenia and the EU average regarding the share of services in the structure of gross value added of the economy. in p.p.* 2000 2005 2006 2007 2008 2009 Services (G-P) -8.6 -8.4 -8.2 -8.7 -8.4 -7.6 Market services (G-K) -6.7 -6.0 -5.5 -5.0 -4.7 -4.9 Trade, hotels and restaurants, transport (G-I) -1.1 0.2 0.3 1.1 1.3 1.0 Financial and business services (J-K) -5.6 -6.2 -5.8 -6.1 -6.0 -5.9 Non-financial market services (G-K excl. J) -6.5 -4.7 -4.9 -4.1 -3.8 -4.2 Public services (L-P) -1.9 -2.4 -2.7 -3.7 -3.7 -2.7 Source: Eurostat portal page - Economy and Finance - National Accounts by 6 branches. 2011 Note: *Minus means that the share in Slovenia is below the EU average 22 These administrative barriers should be considerably reduced by the establishment of a Slovenian Business Portal website as a single point of entry to increase transparency and uniformity of procedures through electronic support. 23 For more on this, see Chapter 3.2 Institutional competitiveness. 24 For more on development and accessibility of public services, see Chapter 4 A modern welfare state. 1.3.1. Non-financial market services In2009 the gap tothe EUaverage in terms ofthe scopeofnon-financial market services widened as traditional services contracted significantly; from a development perspective, increasing the scope and efficiency of knowledge-based services remains a key challenge. The share of non-financial market services25 in the value added of the economy had been approaching the EU average in the years preceding the crisis, but in 2009 it remained level over the year before (40.2%). During the crisis, the relative share of traditional services (retail and wholesale trade, transport, hotels and restaurants) shrank. The outliers compared to the EU average were the severe drop in value added in transport, which in Slovenia is strongly dependent on international trade, and the construction sector, which contracted at a faster rate than in the EU. Available data show that the transport sector recovered substantially in 2010 as international trade rebounded, while its share in the structure of the economy, as well as the share of all traditional services, remained above the EU average despite the drop in 2009. Business services, which are classified as knowledge-based services (with the exception of real-estate activities) account for the bulk of the gap to the EU. The share of business services in the value added of the economy has grown by about one p.p. over the period of SDS implementation (since 2005) but it is still roughly two percentage points below the SDS target (12% in 2013). In this period, Slovenia also narrowed the gap to the EU average as regards the share of all knowledge-based services in the economy (business and telecommunications services), from 1.4 p.p. in 2005 to 0.9 p.p. in 2008.26 Changes in the structure of non-financial market services were well targeted, but too slow to achieve the SDS objectives. Even more problematic is the fact that headway in improving the efficiency of knowledge-based services has been insufficient to bridge the relatively big labour-productivity gap compared with the EU average. Following the time lag with which the crisis in global markets affected international services trade, the competitiveness of Slovenian services on EU markets took a severe blow in 2009. Services exports of all EU Member States dropped in 2009. In that year, total services imports to the EU dropped by about 8%, but Slovenian services exports to EU markets dropped even more, by 14%. These figures indicate a deterioration of competitiveness, which was also reflected in a 7% reduction in Slovenia's market share in 2009. The trend in 2009 was very similar for the five biggest EU markets for Slovenia's services exports (Italy, Austria, Germany, the United Kingdom and Hungary);27 Slovenian exporters suffered the biggest drop in market share in Germany, but their market share in the United Kingdom rose. The biggest decline was registered in other services, a group that includes mostly knowledge-based services, which saw a 12% drop in market share in the EU.28 Within this group, the market share of construction services dropped most (by 22%). Unfavourable conditions on EU markets affected exporters of other services more than exporters of transport or travel services, with transport having already felt the consequences of the crisis to a much larger extent in 2008. Exporters of travel services even increased their market share in the EU in 2009; not, however, because of higher exports, but because their exports to EU markets dropped less than overall imports of travel services dropped in these countries. Innovation in services, one of the key factors of competitiveness, continues to lag behind the most successful countries; the low level of innovation by smaller businesses is particularly problematic. The introduction of technological innovation in services increased only marginally in the period 2006-2008 compared with 2004-2006. Equally important for manufacturing and services companies are non-technological innovations29 and their combination with technological innovations, improving exploitation of the market potential of products and services. Looking at the broader definition of innovation, which includes technological and/or non-technological innovations, the share of services companies active in innovation stood at 46.1% in the period 2006-2008. The gap to the EU average is narrow (2.4 p.p.), but it is significant compared to the most innovative countries30 (26.5 p.p. behind Germany and 17.8 p.p. behind Portugal). The same applies to knowledge-based services, which in general belong to services with above-average innovation activity. The low innovation activity of small services companies remains the biggest problem, in particular in terms of non-technological innovation. Although this is a consequence of multiple factors, for example that small businesses are often started out of necessity and do not have significant desire to grow, the fact is that policy measures to support innovation in services, where the share of small businesses is particularly high, have been inappropriate. Insufficient innovation activity of services companies is a major factor limiting their expansion to foreign markets. 25 The activities wholesale and retail trade, repair of motor vehicles (G); hotels and restaurants (H); transport, storage and communication (I); and real estate, renting and business activities (K). 26 The latest available international data for the knowledge-based services group (business and telecommunication services) are for 2008. 27 Hungary supplanted France in the group of the biggest EU markets for Slovenian services exporters. Outside the EU, the most important markets are Croatia and Switzerland. 28 In 2008, these services saw the fastest growth of market share in the EU (by 15.4%). 29 These include innovations in organisation (e.g. new business models, organisation of the value added chain, quality management; new methods of organisation of customer and supplier relations such as partnerships and outsourcing; and new methods of work and decision-making such as team work, systems for education and training of employees) and/ or marketing (e.g. design novelties, new media and new promotional techniques). 30 See indicator Innovation active enterprises. A lack of competition in services has been evident in certain network industries and wholesale and retail sectors for years, but there have been some signs of improvement in recent years. In 2009, when some parts of the economy contracted at an accelerated pace, the number of highly concentrated31 industries and their share of total revenue increased, probably due to the fact that in the early stages of the crisis, larger companies were able to adapt more easily to the tougher economic environment with cost-cutting than smaller companies, affirming their market position. Highly concentrated industries that stand out in international comparisons in terms of mark-ups include certain network industries (post and telecommunications), as well as retail and wholesale trade sectors (retail trade in non-specialised, predominantly grocery stores, some segments of wholesale trade). Detailed analysis of individual telecommunications markets in most cases shows Box 1: Competition in selected network industries Within network industries, competition in the electronic-communications market continues to increase and has already reached the EU average in certain segments; in electricity supply, positive trends are indicated in particular by increasing number of switches of provider. In electronic communications, the market share of the biggest provider decreased most in fixed telephony in recent years, where VoIP1 telephony has been rapidly undercutting traditional telephony (APEK data show that the incumbent operator had a market share of only 60%) and allowing new operators to enter the market2. In fixed telephony and broadband Internet access, market concentration is already comparable to the EU average but still far behind the three countries with the lowest concentration. In mobile telephony, meanwhile, the market share of the biggest provider is still noticeably above the EU average (see table). Mobile telephony penetration rates are also below the EU average (Slovenia: 102.2%, EU: 121.9% in July 2009) Mobile telephony prices3 were 2.9% above the EU average for the low usage basket of services, and 4.1% and 15.3% below the EU average for the medium usage and high usage basket of services respectively, whereas in fixed4 telephony they were 22.7% and 26.9% lower for residential and business users respectively. The ownership structure in this area underwent little change, as the state's ownership share in the biggest provider of telecommunications services remains high. Similarly, the majority of the electricity-supply business remains state-owned. The structure of the electricity-supply market has been changing more slowly, but there have nevertheless been positive signals. According to the Energy Agency, the market share of the biggest electricity producer was 68.4% in 2009 compared with an EU average of approximately 60%. In the retail market, there were 17 suppliers in 2009, while the HHI index was 1,6855 indicating medium concentration. However for the retail market for consumption from the distribution network, which includes households, the index was 1,933, which shows that market concentration was higher. The relatively strong oligopoly of suppliers in this market is evident in particular in prices for industrial consumers, which exceeded the EU average by 0.9% in the first half of 2010, while prices for households were 13.6% below the EU average. However, data on the number of changes of provider show that competition in the electricity market is improving: in 2009, there were 12,7496 changes, nearly 2.5 times the level in the previous year. Table: Market shares1 of the biggest electronic communications providers, in % Slovenia EU EU-33 Q42007 Q4 2008 Q4 2009 Q42010 Fixed telephony 92.6 85.7 82.82 76.9 90.5 jul 2006 75.9jul2009 63.2 jul 2009 VoIP - Voice over Internet Protocol 48.1 47.7 48.02 42.7 Mobile telephony 65.6 58.9 56.3 54.7 39.4 2006 37.9 2009 29.9 2009 IPTV - Internet television 61.4 62.0 61.3 60.2 Broadband Internet access 50.2 49.1 45.9 43.1 46.8 jan 2007 45.0 jan 2010 29.0 jan 2010 xDSL - Internet via phone line 69.4 67.9 65.8 64.1 Source: APEK, quarterly reports, various issues, 2007-2010, Progress Report on the Single European Electronic Communications Market 2009 (15th Report), 2010. Note: 1By number of lines; in mobile telephony by number of active users. ^Increase in market share is an artefact of changes in data collection; concentration actually continued to drop. 3Average of three EU countries with lowest concentration in individual market. 1 Voice over Internet Protocol. 2 The number of providers had already risen to 10 by the end of 2010. 3 EC, Report on Telecoms Price Developments 1998-2009, 2010. OECD baskets of mobile telephony services include domestic calls (partially to other mobile and fixed networks), SMS, MMS and voicemail (does not include international calls) in the cheapest package. 4 EC, Progress Report on the Single European Electronic Communications Market 2009 (15th Report), 2010. OECD baskets of fixed telephone services include subscription, domestic and international calls, and calls to mobile networks in the cheapest package. 5 The market share of the biggest provider was 29.2%. 6 Of which 8,722 were households, where the increase was particularly high. There are just over 900,000 customers in the retail market for consumption from the distribution network, which means that 1.4% switched providers. 31 Measured with the Hirschman-Herfindahl index (HHI) of market concentration, where index values above 1,800 indicate high concentration. a gradual drop in the market share of the dominant operator and a convergence with average values in the EU (see Box 1). Since 2006, competition has also been improving in a significant portion of the retail sale of food (non-specialised, predominantly grocery stores), where concentration surged in the first half of the past decade as smaller grocery stores folded and big hypermarkets expanded; in recent years (2007-2009), concentration has dropped with the arrival of new foreign retail chains, but it remains high.32 In postal services, where Slovenia has only one provider, competition is expected to improve in the coming years following the full liberalisation of the postal-services market in 2011. In individual wholesale trade segments, where wholesale trade in fuels and wholesale trade in tobacco products stand out in international comparisons of mark-ups, concentration has increased substantially in recent years. Throughout the period of SDS implementation, the main weakness of market services in Slovenia has been low productivity, which is especially glaring in knowledge-based services, a segment that has an instrumental direct and indirect impact on efficiency of the business and public sectors. In its communication on industrial policy, the European Commission has been highlighting the importance of knowledge-based services for strengthening the competitiveness of manufacturing (C0M(2010)614). Although knowledge-based services introduce technological innovation based on cutting-edge technologies, they rely on non-technological innovation and adaptations to customer demands. These include the introduction of new organisational approaches and business models, marketing, design and branding, which increase the value added, and quality and productivity of services, and strengthen the competitiveness of the entire economy.33 Progress has been made in this field in recent years, but was achieved from a low baseline. Without additional efforts by the business sector, including greater cooperation between companies, and support mechanisms provided by the state, it will be difficult to expand in foreign markets. Moreover, innovation policy instruments have insufficiently considered the importance and specificity of non-technological innovation, resulting in a lack of support for faster introduction of such innovations, in particular for smaller companies. What is required foremost for innovation is highly qualified staff, specialist know-how by external providers and permanent investment in human-resources development in a variety of fields. To encourage innovation and hence improve competitiveness, it is necessary to continue strengthening competition, in particular in regulated industries. 1.3.2. Financial services Measured by indicators of the development of the financial sector, Slovenia slipped considerably in 2010, with the gap to the most developed countries widening, according to our estimate. It was not until 2010 that banks experienced the main force of the consequences of the financial crisis, which had started in mid-2007. Banks' total assets as a share of GDP, having grown since 1996, decreased for the first time since comparable data34 became available. The tightening in the banking sector had the most severe impact on businesses with higher than average dependence on bank lending. Market capitalisation of stocks as a share of GDP also fell dropping by just under two thirds from its 2007 peak. The turnover ratio of shares, which had already been among the lowest in the EU, nearly halved in 2010, indicating the poor performance of the Slovenian capital market. Insurance premiums as a share of GDP rose in 2009, the latest year for which data are available, but this is largely an artefact of the severe contraction of GDP since premium growth was at the lowest level in the last ten years. The gap to developed countries narrowed marginally, but it widened in life insurance, a key indicator of the level of development of the insurance industry. In this field, Slovenia is lagging behind even some new EU Member States. Bank lending, the most important source of financing for Slovenian companies, has been very limited during the crisis. After banks obtained the necessary liquidity for repaying maturing foreign loans from the government and the ECB in 2009, the treasury started to gradually withdraw bank deposits in 2010. Their new outflow in 2010 was EUR 853.5 m. Banks also reduced their liabilities to the Eurosystem, finding other sources to meet their liabilities. Deposits with the ECB as well as foreign banks dropped. While the ECB is still offering unlimited short-term financing at fixed interest, last year it started to abandon several measures adopted when the crisis on international financial markets was escalating at the end of 2008. Thus, 12-month long-term refinancing operations are no longer available, reducing the availability of longer-term financing. In 2010, the principal sources of long-term financing were restructuring of the maturity of household deposits,35 issue of state-guaranteed bonds36 and, to a lesser extent, higher long-term government deposits. 32 The HHI for this industry dropped from 3,387 in 2006 to 2,694 in 2009. 33 Services and innovation in services play a key role in the implementation of the EU2020 strategy and need to be considered in the framing of industrial and innovation policy (Expert Panel on Service Innovation Report, 2011). 34 From 1994. 35 The share of long-term household deposits rose by nearly 8 p.p. to 28.0% in 2010, which we estimate to be the consequence of modest availability of foreign sources: banks were forced to focus on households and attract them to long-term savings with above-average interest rates. The inflow of these long-term sources slowed down abruptly towards the end of the year. 36 SID Bank bonds worth EUR 750 m account for the bulk of the total. Pressure on bank liquidity will remain significant; given limited domestic financing, banks will continue to rely on international financial markets, where the situation is still uncertain. In 2010, net payment of foreign credit and deposits was much lower than in 2009,37 but it remains relatively high. At the end of the year, liabilities to foreign banks totalled EUR 15 bn, with roughly half of the total falling due in two years.38 Securing longer-term financing on international financial markets crucially depends on banks' financial stability, as measured with the core capital ratio. Slovenia places among countries whose banking systems have core equity capital relative to risk-weighted assets at the lower end of the scale. The consolidated indicator was below the EU average in 2009 and had dropped further until the end of June 2010, whereupon it inched up according to the ECB indicator for large banking groups. Considering the rapid deterioration in banks' assets, we may expect that the capital adequacy of the Slovenian banking system will continue to worsen. The top three banks in the country saw their credit rating downgraded at the end of 2010, which will make it more difficult for banks to obtain much-needed financing and drive up the cost of borrowing; this could spill over to produce higher active interest rates and a significant contraction in bank investment volume. Figure 9: Tier 1 core capital ratio in EU Member States 22 20 18 16 14 12 Mi 1 1 1 1 1 III...... SfSiSMiSi 2008 ^^ 2009 ^^ Ju ne 2010 .....EU 2008 -EU 2009 : : Source: EU Banking Sector Stability, 2010; Slovenian Banking Sector Stability, 2010. The financial crisis affected the liquidity of the Slovenian banking system relatively quickly, but the impact on the quality of portfolio investment was delayed. The share of non-performing claims started rising in 2009 and only accelerated in 2010. The deterioration of the quality of banks' assets was exacerbated by the high exposure of the banking system to companies involved in buyouts and takeovers and companies dependent on the construction sector. Construction is the biggest outlier, non-performing claims to the sector having surged by 530% in the last two years as opposed to a 115% rise in overall non-performing claims. Non-performing claims in sectors that were involved in buyout and takeover activities and in construction39 totalled EUR 786.3 m at the end of 2010, accounting for over 40% of all non-performing claims. Non-performing claims to foreigners and households also started rising at a faster pace in 2010, which in our estimation may already have been a consequence of the unfavourable situation on the labour market. However, the share of non-performing claims to households did not increase drastically since the total volume of claims is high. In the last year, risks also surged in the retail and wholesale trade, which accounts for just under a tenth of all bank claims.40 As the quality of assets deteriorated at an accelerated pace in 2010, banks set aside EUR 798.0 m for provisions and impairments, almost 60% more than in 2009. Non-performing claims rose to 3.7% of all the banking system's classified claims, roughly double the figure before the outbreak of the crisis. Although a significant portion of C-rated loans turned to non-performing loans Figure 10: Growth rates and share (of total assets) of non-performing loans and C-rated loans Share of C-rate claims Share of non-performing loans ---Growth of C-rate-claims year-on-year (right axis) - Growth of non-performing loans year-on-year (right axis) 4.5 4.0 3.5 3.0 J^ 2.5 m 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 Source: Bank of Slovenia, IMAD calculations. 160 140 120 100 80 o 60 40 20 0 -20 37 Net payment of foreign loans and deposits totalled EUR 1.5 bn, less than half as much as in 2009. 38 Estimate based on the data for October published in the Stability of the Slovenian Banking System (December 2010). 39 These industries include: production of foods, beverages and tobacco products, construction, financial and insurance services, real-estate activities, and scientific and technical services. 40 The volume of loans with a C rating increased to 2.4 times its previous level in this industry. 8 6 4 2 0 2010 in 2010, their share continued to grow, indicating either an accelerated downgrading of loan ratings or stronger crediting of riskier customers since the state guarantee scheme also provided guarantees for customers with the lowest, C rating. We therefore expect that the quality of bank assets will continue to deteriorate. development projects on competitive terms. This would make a significant contribution to accelerating the economic recovery. Limited sources of financing, and a rapid deterioration in the quality of assets with an attendant increase in impairments, have kept banks' lending activity at a low level despite measures adopted by the state, and this is holding back the economic recovery. During the crisis, banks on the one hand increased lending to the less risky segments such as households and the general government, but on the other hand also expanded the crediting of over-indebted41 sectors that are struggling to pay liabilities, and thus mitigated their liquidity problems in the short term. With growing exposure to over-indebted sectors during the crisis, banks reined in the increase in non-performing claims in the short term, but at the same time held back the recovery. Net borrowing of households and the general government accounted for practically the entire net borrowing of non-banking sectors, whereas borrowing by businesses was modest as companies deleveraged with domestic banks. Small and medium-sized enterprises were affected most: interest rates in Slovenia are among the highest in the euro area and SMEs have very limited options for non-bank financing. At the same time, they are also highly exposed to payment indiscipline. Companies and NFIs net repaid domestic bank loans in the amount of EUR 125.2 m, compared with net borrowing of EUR 23.6 m in 2009. We estimate that without the guarantee scheme, the crediting of companies and NFIs would have been even more modest. Based on guarantees, in 2010 companies and NFIs had net lending of just over EUR 250 m; in 2009 and 2010, when the guarantee scheme was in force, only approximately 40% of all guarantees were used. This data leads to the conclusion that the guarantees were largely used for refinancing of existing loans, with only a minor portion allocated for the financing of new projects. After the adoption in 2010 of the act on guarantees for investments, EUR 50 m in guarantees were offered at one auction but no credit was approved on this basis in 2010.42 In addition to the lower quality of demand for credit by businesses, a reason cited by banks, we estimate that this was also a consequence of the reduced willingness of banks to finance businesses. The latest available data show an increase in lending to businesses in early 2011. Banks are still grappling with limited access to financing, additionally aggravated by their low capital adequacy ratios. To provide better support for the economy, it is therefore necessary to improve the stability and capitalisation of the banking system so it may provide adequate financing for 41 Construction, in particular. 42 Ministry of Finance data show that two loans totalling EUR 2.1 m were approved in January 2011 based on this guarantee scheme, but data are not yet final as the call for applications will be completed only at the end of July 2011. 2. Efficient use of knowledge for economic development and high-quality jobs SDS guidelines: SDS priorities aimed at efficient creation, two-way flow and application of knowledge for economic development and high-quality jobs are: improving the quality of tertiary education, promoting lifelong learning, and increasing the effectiveness and level of investment in research and technological development. 2.1. Education and training An important factor of economic development is human capital, which Slovenia is gradually improving despite a certain weakness in efficiency of investment in human capital. Improved quality of human capital brought about by education is a key factor for increasing productivity and economic development. Essential for improving human capital are opportunities to acquire new knowledge and a higher level of education (measured by participation in education) and lifelong learning. The social return on investment in human capital reflects in higher productivity, a culture of innovation, and faster economic growth. The social return on investment in education depends on the efficiency of the studies undertaken and on whether the supply and structure of education correspond with human-resource needs in the business sector. Analyses show a positive correlation between the share of population with tertiary education and the economic development of the society (measured in GDP per inhabitant at purchasing-power parity). De la Fuente (2003) estimates that, on average across the EU, a one-year increase of the average number of years of schooling improves productivity by 6.2% in the short term, and by an additional 3.1% in the long term. At the level of the economy, human capital is often measured by the share of population with tertiary education or by the average number of years of schooling. In 2010, the average years of schooling of the adult population was 11.9, which is 0.7 p.p. more than in 2000. Both indicators point to a gradual improvement of human capital in Slovenia in 2000-2010, although these levels are still significantly behind those in the most developed countries. As regards investment in human capital, Slovenia's main shortcomings include low efficiency and quality of schooling, and a mismatch between the supply and demand for specific skills. Over the period of implementation of Slovenia's Development Strategy, the level of education improved but the gap behind the most developed countries did not narrow significantly. In 2010,43 the share of adult population (aged 25-64) with a tertiary education rose to 23.7% (EU: 25.7%). Over the period of SDS implementation, this share grew slightly faster than the EU average, but Slovenia was nevertheless unable to significantly reduce the gap to the most successful countries on this indicator. This was mainly due to the low efficiency of schooling indicated by the number of students compared with the number of graduates per 1,000 inhabitants aged 20-29: in fact, in terms of the number of students enrolled in tertiary education per 1,000 inhabitants aged 20-29, Slovenia exceeds the EU-27 average, while lagging behind in the number of graduates of the same age group. The relatively modest progress is also the result of poor adult participation in tertiary education, which is considerably less than the rate of participation of young people. The share of population with a tertiary education in the 30-34 age group, which, according to the Europe 2020 strategy should increase to 40% by 2020, accounted for 34% in the second quarter of 2010 (EU: 33.4%). The average duration of university undergraduate studies in 2009 was 6.3 years, slightly decreasing compared with the level a year previously because of a higher share of graduates following Bologna-system programmes of study. It should be underlined, however, that in 2006/2007 (the year for which the latest international data are available) the average duration was much longer than in other countries. Slovenia also lagged behind the average of the 19 EU countries that are members of the OECD, Figure 11: Completion rates in tertiary education1, OECD, 2008, in % 100 90 80 70 60 50 40 30 10 Source: Education at a Glance 2010 (OECD), 2010. Note: 1The tertiary education completion rate is the ratio (expressed in %) between the number of graduates from the selected tertiary education programme and the number of new entrants "n" years ago. 3 Data refer to the second quarter of the year. 20 0 as well as behind the overall OECD average as regards completion rates in tertiary education in 2008 (latest data) (see Figure 11); compared with 2005, the gap did not narrow significantly.44 Participation of young people in education is high, while adult participation is considerably lower. Participation of the population aged 15-19 in upper-secondary education is high, and well above the EU average. The upper-secondary education completion rate in Slovenia exceeds the average of the 19 EU countries that are members of the OECD, although it has slightly decreased over the last two years. This resulted in a minor increase in the share of early school leavers,45 which, however, remains low and well below the Europe 2020 strategy target (10% of early school leavers, on average, in the EU in 2020). Under the Europe 2020 strategy, Slovenia set itself the goal of keeping this relatively low share rather unchanged (5.1%). Participation of young people at enrolment age in tertiary education is growing and in the academic year 2009/2010 slightly exceeded the SDS target (55%). Also high is participation of the population aged 20-24, which was the highest among the EU countries in 2008 and grew faster than in other countries throughout the period 2000-2008.46 High participation of young people in tertiary education is welcome in terms of accessibility of education. However, it should be underlined that the high enrolment rate in Slovenia is partly attributed to the benefits offered by the status of being a student (rather than to the intention of finishing studies) and related to the delayed entry of young people on the labour market. Adult participation at all levels of formal education47 decreased in 2008 (latest data) for the second consecutive year. That year saw reduced participation in upper-secondary and tertiary education, while participation in primary education stayed at the previous year's level. Adult participation in education tends to grow proportionally to the level of education; thus, the participation rate is lowest in primary education and highest in tertiary education. As regards the share of adult participation in tertiary education, Slovenia does not depart from the average as much as in youth participation, which is probably related to the costs of tuition fees paid by adults enrolling in part-time study programmes as well as to problems in balancing study, work and family obligations. Participation of adults can be significantly encouraged through state incentives. Adult enrolment in secondary schools has recorded a downward trend since 2003/2004; as regards the structure of students by source of financing, the largest decrease is observed among those who pay for their studies themselves, and their share is growing rapidly. In the period 2007/2008-2009/2010, an open invitation to co-finance tuition fees was extended to reduce the education deficit,48 but the number of persons who actually obtained co-financing was less than expected.49 A reason for this modest interest in the programme could be the manner in which education was financed, i.e. by refunding already-paid tuition fees, which might have represented an obstacle to less educated persons with lower incomes. Adult participation in lifelong learning increased over the period of SDS implementation. Participation of adults (aged 25-64) in lifelong learning in the second quarter of 2010 was 18.2% (0.4 p.p. more than in 2005) and significantly exceeded the EU average (9.7). A departure from otherwise favourable trends is shown by participation of the elderly, which in Slovenia is decreasing faster than on average in the EU. The share of the elderly (age group 55-64) in education was 7.9% in the second quarter of 2010 and lags behind the rate in the Netherlands (9.6%), where overall adult participation is comparable to Slovenia (18%). Such a rapid decline of participation with age could point to the problem of accessibility for older age groups. Higher participation of the elderly could contribute to greater employability of this age group and longer work activity. According to the data for 2009 (the most recent available), participation by achieved level of education in Slovenia is above the EU average as regards the population with a tertiary or upper-secondary education, and below the average among those with a low level of education.50 Compared with other EU countries, Slovenia records the largest difference between the share of those with a tertiary education and the share of those with a low level of education taking part in education. According to available partial criteria of quality of education, there has been no improvement over the period of SDS implementation. Wössmann, L. and Schütz, G. (2006) stress the importance of investment in lower levels of education, since this improves the quality of the learning process and learning outcomes at all levels of education. The results of the 2009 international education study 44 Data are available for 2005 and 2008. 45 Percentage of the population aged 18-24 with at most lower secondary education not in further education or training. 46 In 2008, participation equalled 47.7% (EU-27: 28.7%) and compared with 2000 grew by 15.5 p.p. (EU-27: by 4.9 p.p.). 47 Primary, upper secondary and tertiary education. 48 The purpose of the open invitation was to encourage - by co-financing tuition fees - at least 5,000 adults to complete formal education programmes up to the upper secondary level of education. 49 The programme was intended for 5,000 persons, yet only 1,410 persons eventually obtained financing and joined the programme. 50 In Slovenia, the level of participation of the population with tertiary education in 2009 was 25.8% (8.6 p.p. above the EU average), of those with upper secondary education 13.4% (5.1 p.p. above the EU average), and of those with a low level of education 3.2%, lagging behind the EU average by 0.8 p.p. 51 PISA is the OECD programme for international student assessment of reading, mathematical and scientific literacy. It is carried out every three years and involves 15-year-old pupils and students regardless of the school attended. Its purpose is to gather data on the competences the students need in their future private and professional life, and which are important for PISA51 (involving 15-year-olds) reveal that in scientific and mathematical literacy Slovenia scored higher than the EU and OECD average, with below-average results achieved in reading literacy. Compared with the results of the 2006 study, the achievements of Slovenian students declined in all three tests, although the decline in mathematical literacy was not statistically characteristic. The quality of education also depends on the ratio of students to teaching staff, with a lower ratio normally increasing the likelihood of high-quality education. In the period of implementation of SDS, this ratio has slightly improved (2008: 20.5), although Slovenia still lags considerably behind the OECD average. The ratio in Slovenia is affected by the fact that young people not only enrol in education to acquire knowledge but also to take advantage of the benefits of being a student. The degree of satisfaction with higher-education graduates' skills to the requirements of the business sector in Slovenia is low and the structure of enrolment does not meet the needs of the labour market. In addition to the field of study, the level of suitability of graduates' skills (assessed in the Eurobarometer survey52) is also important in terms of employability and labour-market needs. According to this survey, the share of companies in Slovenia that disagree or strongly disagree with the statement that graduates recruited in the last three to five years had the required skills is one of the highest in Europe (see figure 12). The rather low quality of graduates' skills is largely related to the relatively modest representation of active learning forms during their studies53 (as shown by the Hegesco survey54) and the above-mentioned unfavourable ratio of students to teaching staff. The structure of enrolment in tertiary education by field of study is gradually changing, yet the changes are too slow in terms of demand for graduates on the labour market and the number of graduates in science and technology is still too low given the needs.55 This structural problem mainly derives from the lack of systematic monitoring and anticipation of needs, and this should be rectified as soon as possible. Figure 12: Share of employers considering graduates' skills unsuitable* both the individual and society as a whole. The study does not focus on the outcomes of school curricula. Data for Slovenia are available for 2006 and 2009. 52 The Eurobarometer Employers' perception of graduate employability (2010) regarding companies' views on graduates' skills. The survey was carried out in EU countries and included companies with at least 50 employees in the business sector. 53 According to the 2008 Hegesco project (Higher education as a generator of strategic competences), the share of Slovenian graduates who believe that their study programme emphasised project and problem-based learning, participation in research projects, group assignments, and internship and work placement to a high or very high extent was below the EU average. 54 The Hegesco project was carried out in Slovenia in 2008 and involved 2,950 graduates five years from graduation. 55 Although the number of graduates in science and technology rose by 23.6% over the period 2000-2009, with regard to their share per 1,000 inhabitants aged 20-29 (10.4), Slovenia still lagged significantly behind the best and the EU average in 2008. Source: Eurobarometer Employers' perception of graduate employability, 2010. Note: *Share of employers disagreeing or strongly disagreeing with the statement that graduates have the required skills to work in their companies. Public expenditure on education as a share in GDP56 in Slovenia is relatively high, although below the EU average in terms of expenditure per participant. In 2008, public expenditure on education accounted for 5.19% of GDP, which was more or less the same as in 2007 (5.16% of GDP). In 2000-2007, it exceeded the EU average. The relatively high public expenditure on education compared with GDP is related to the high level of participation of young people in education, which is among the highest in the EU. In 2000-2008, public expenditure on education as a share in GDP fell at all levels of education, with the exception of the pre-school level, which was due to the increased participation of children in pre-school education (see Chapter 4). The annual expenditure on educational institutions per participant, expressed in PPS, grew in 2001-2007 by 30% (to 6,055.4 PPS in 2007), but still lags behind the EU average; expenditure per student in tertiary education is particularly low. The share of private expenditure in total expenditure on education decreased over the period of SDS implementation, due to the lower share of part-time students and increased enrolment in second-level Bologna programmes, which are free of charge for full-time students. 56 Total public expenditure on education includes all budgetary expenditure on formal-level education for young people and adults at the level of the state and municipalities, i.e. public expenditure on educational institutions and household transfers (scholarships, subsidies for meals, travel, accommodation, textbooks, etc.). Financial data for Slovenia are gathered in accordance with an internationally comparable methodology using the UOE questionnaire (the common questionnaire of Unesco, OECD and Eurostat). The draft Resolution on National Higher Education Programme 2011-202057 focuses on certain problems already highlighted in previous Development Reports. The resolution thus envisages an increase of public expenditure on tertiary education as a share of GDP and per participant, and the establishment of a system of financing higher-education institutes that takes into account the elements of quality. Moreover, it anticipates the drawing up of a national framework of qualifications with regard to the needs of society, the long-term prospects of Slovenia's development, and the employment possibilities of graduates in determining the number of enrolment places for individual higher-education programmes. To improve the efficiency of studies, the resolution envisages a limit to the duration of tuition-free studies and to the benefits of being a student. It also predicts a significant growth of youth participation in tertiary education. Since participation in education is already among the highest in the EU, while expenditure per participant is relatively low, we estimate that this could lead to problems in implementing and achieving the goal of improving the quality of education. 2.2. Research, development, innovation and use of information-communication technologies In the crisis year, 2009, Slovenia increased its investment in research and development (R&D). In 2009, government measures to improve competitiveness contributed to a considerable increase of total expenditure on R&D (by 5.5% in real terms) which accounted for 1.86% of GDP, reducing the lag behind the EU average level. It should be underlined that in the same year the level of GDP in Slovenia declined more significantly than in the EU. In relative terms, however, the volume of expenditure on R&D still trails Slovenia's target under the Europe 2020 strategy, which is to increase investment in R&D by 2020 to 3% of GDP. In 2009, government-sector expenditure on R&D accounted for 0.67% of GDP, and this is targeted to increase to 1% by 2012 and further to 1.2% of GDP by 2020 in line with the objectives of the Research and Innovation Strategy of Slovenia (RISS, 2011). A significant increase of funds from abroad was also seen in 2009,58 while the business sector reduced investment in R&D in both nominal and real terms. This reduced its share in total expenditure on R&D, which had been showing 57 The draft Resolution was adopted by the government on 10 March 2011 together with the draft Resolution on the Research and Innovation Strategy of Slovenia 2011-2020. 58 In the period 2008-2009, structural funds made an important contribution to increasing the resources for R&D promotion measures, the effects of which are yet to be seen. It should be mentioned that all available resources were distributed, which means that the programmes were very well designed. a constant upward trend since 2005.59 Although the response of the business sector to the crisis was to a certain extent expected, it nevertheless points to a lack of strategic response to unfavourable circumstances, and to an absence of continuous strengthening of development potentials in times of crisis. This is further confirmed by a considerably lower exploitation of both general and regional tax relief for R&D investment. The use of both types of tax relief remains concentrated in a small number of enterprises. The significant increase in general tax relief that became applicable in 2010 should additionally encourage the business sector to invest in R&D also in times of crisis. Irrespective of the lower business-sector investment in 2009, the number of researchers in this sector grew, in parallel with their share in the total number of researchers (to 44%). Thus, Slovenia significantly narrowed its gap behind the EU average and continues to improve the absorption capacity of its business sector to create and transmit new knowledge. The success of this process and the increase of innovation activity in the business sector largely rely on the availability of qualified staff (not only researchers with a PhD degree) who has knowledge and competences in various fields that are important for innovation within the entire value chain. A combination of adequate knowledge and skills is also relevant for innovation in the public sector and to solve outstanding social problems, such as the ageing of the population, health, and environmental issues. Human capital is the basis of innovation; unfortunately, Slovenia has a shortage of various job profiles, which is most evident in science and technology. Despite progress, the inflow of science and technology graduates is unfavourable, with the exception of PhD holders. The number of graduates in science and technology is gradually increasing but nevertheless (in terms of graduates per number of inhabitants aged 20-29) lags behind the EU average, and the situation is similar with respect to their share in the total number of tertiary graduates60 where the gap behind the EU average in 2008 (latest available data) narrowed. This confirms that the insufficient pool of adequately qualified human resources in science and technology is indeed an outstanding issue. Although changes in the educational structure of tertiary graduates require a longer period of time, it is evident that the response to negative trends in this field was late. In addition, more rapid progress is hindered by the low efficiency of studies, which applies to tertiary education in general.61 The shares of science and technology graduates in the total number of graduates show significant differences as regards the level of study programme, which derive from the structure of students enrolled in these fields of study (see Figure 13). While the share of graduates from professional study programmes, 59 See Indicator Gross domestic expenditure on research and development. 60 The share of graduates of science and technology in the total number of graduates in 2009 was much lower than in 2000. 61 See Chapter 2.1. Education and training. university undergraduate study programmes and master's study programmes is decreasing, the share of students completing higher vocational programmes and doctoral study programmes is growing. The latter accounted for 48.7% of all graduates of doctoral study in 2009, which points to a positive impact of incentives for enrolment to doctoral studies in these fields. The measure intended to co-finance young researchers stipulates a high share (62%) of young researchers in science, mathematics and technology studies.62 Analyses reveal positive effects of the Young Researchers from the Economy Programme in terms of transfer of knowledge from higher-education institutes to the business sector, indicated by the fact that most companies and young researchers appreciate the benefits of the programme.63 The quality and applicability of scientific and R&D work, and the transfer of knowledge between the scientific and research spheres and users improved. A considerable improvement was also recorded in cooperation between research institutions and the business sector. After the completion of their training, most young researchers remained employed in the company that trained them. A problem, however, arises in relation to PhD holders who are not employed in companies and do not obtain Figure 13: Shares of graduates in science and technology in total number of graduates, by type of educational programme, Slovenia, in % 80 70 Higher Professional and Masters and Doctoral study vocational university specialisation programme education undergraduate study study programme programme Source: SURS; calculations by IMAD. Note: The large share of graduates in science and technology in short-cycle higher education in 2000 results from the fact that in other fields of study these programmes strengthened only after 2000. 62 Open call for mentors of new young researchers for 2011 - call in 2010, 2010. The share increased compared with that in the previous year. 63 Bučar et al. (2010). Učinkovitost Ministrstva za visoko šolstvo, znanost in tehnologijo za spodbujanje inovacij in tehnološkega razvoja v slovenskih podjetjih v letih 2005-2007, Ciljni raziskovalni program (Effectiveness of the Ministry of Higher Education, Science and Technology measures for promotion of innovation and technological development in Slovenian enterprises in 2005-2007, Target Research Programme). employment in the academic or research sphere.64 The situation is different in higher-education undergraduate studies where, in the absence of adequate incentives for studying science and technology, the share of students in these fields is rather low, although increasing. The results of the PISA survey for 2009 (of 15-year-olds) reveal that Slovenia now achieves comparatively good results in science. It should, however, encourage young people more systematically to enrol in science and technology study programmes. In 2006-2008, the innovation activity of enterprises in the field of technological innovations slightly decreased. In 2006-2008, the share of enterprises that introduced technological innovations in products, services and processes was 34.4%, recording a downward trend compared with the previous period65 (2004-2006). Although certain EU countries saw the share of innovation-active companies fall even more radically, Slovenia is among the half of the Member States that during the crisis reduced innovation activity measured by technological innovations. Given the fact that innovation occurs throughout the entire value chain and not merely in R&D, a broader definition of the innovation activity of enterprises was acknowledged, comprising both technological and non-technological (organisation, marketing) innovations.66 This definition of innovation served as the basis for the innovation survey for 20062008. Data reveal that during that period, half of Slovenian enterprises (50.3%) were innovation active, which placed Slovenia below the Czech Republic and Estonia, as well as below almost all old Member States. Slovenia's relative gap behind the most successful countries in terms of innovation is slightly broader in service activities than in manufacturing. The new definition of innovation activity is justified by the results of the survey showing that in almost all EU Member States the share of enterprises that introduce either only technological or only non-technological innovations is considerably lower than the share of the enterprises introducing both types of innovation.67 This applies to manufacturing and services, and reflects the inadequacy of the previous instruments for promotion of innovation activity. Since they concentrate on encouraging technological innovations, it is also necessary to design mechanisms and incentives focusing on the various aspects of non-technological innovation and on the specific features of innovation in service activities and functions. To improve the total innovation activity of Slovenia, it is necessary to enhance non-technological aspects of innovation. Investment in R&D has a limited influence on innovation activity in most service-providing companies, 64 In 2010, a third of all unemployed people holding a PhD came from science studies and 27% from technology studies (Kozmus and Vrečko 2010). 65 Data on innovation activity are available for three-year periods. 66 Oslo Manual, 2005. 67 See Indicator Innovation activity of enterprises. 90 60 50 40 30 20 10 0 whereas a much greater impact in introducing new services is made by employees' knowledge and skills in organisation, intellectual property and marketing, as well as by taking account of user needs. Therefore, expenditure on non-technological aspects of innovation is urgently required to increase the total innovation activity of Slovenia. The past five years, however, have seen a drastic reduction of non-R&D expenditure on innovation.68 These shortcomings were partly addressed by the 2010 broadening of criteria to obtain innovation vouchers designed for companies that use the services of external advisers in preparing and implementing development-oriented projects. To be eligible for vouchers, the use of external services by companies needs to result in an application for a Community design or trade mark and not only in the application for a patent. Yet many innovations in service functions are not reflected in intellectual-property rights but rather represent an organisational innovation allowing companies to achieve greater efficiency and quality of service for users. In introducing organisational innovations and business models, a special role is played by consultancy companies, the services of which are not included among justified costs of innovation vouchers. A small share of innovation-active small enterprises is another problem for the innovation activity of the business sector and is partly related to the fact that small entrepreneurs find the "motive of survival" more important than taking advantage of new business opportunities. Consequently, their risk-averse behaviour represents a challenge for the design of appropriate incentive measures. For small enterprises, obtaining funds to finance innovation activity has been made even more difficult by the crisis. Likewise, the poor supply of venture capital and long-running processes for the state's entry on the venture capital market have hitherto not encouraged innovation activity in small enterprises in more risky sectors.69 The contract on state investment in private venture-capital companies signed in late 2010 provides for a total of EUR 42 million in 2011 (of which EUR 34 million of state funds) intended to facilitate access to financing for entrepreneurs.70 An increasingly important elementfor the overall innovation of the state is innovation in public administration and public sector. These innovations improve the quality of service for the business sector and citizens, and thus strengthen the efficiency of private and public sectors. The Innobarometer 2010 survey is a first systematic approach to analysing innovation in public administration in European countries. The results obtained from the 68 In 2004-2009, such expenditure, measured as a share of company's turnover, decreased by 8.4% (Innovation Union Scoreboard 2010, 2011). 69 Slovenia, like most new EU Member States, lacks a culture of using venture capital as a mechanism to encourage entrepreneurial activity. 70 In 2010, the state earmarked EUR 20.6 million for this purpose through the Slovenian Enterprise Fund. questionnaire71 addressed to public-administration units at various levels (local, regional, national) indicate that in the EU two thirds of institutions have introduced new or significantly improved services in the last three years. Slovenia's share is 76%, which, however, must be interpreted with some caution since the results among the countries are not fully comparable.72 Nevertheless, a systematic encouragement and monitoring of innovation in public administration and in the entire public sector is absolutely necessary for more efficient solutions. Analysis should also take into account the fact that new forms of cooperation between public and private sectors arise, such as public-private innovation networks, which take advantage of the complementary assets of the actors in both sectors. At the same time, it is necessary to develop mechanisms promoting not only supply of but also demand for innovative products, services, business models and processes. With public procurement, the public sector can significantly increase demand, thus encouraging companies towards faster introduction of innovative products, services and processes, as well as to solving problems concerning environmental protection, energy efficiency, the ageing population, health, etc. Slovenia is moving forward in intellectual property although the gap behind the EU average is narrowing faster in Community trade-marks and designs than in patents.73 Achievements in the field of intellectual property are an important indicator of the transfer of knowledge to innovative products and services. With 58.6 patent applications per million population (provisional data) filed by Slovenian applicants at the European Patent Office (EPO) in 2009, Slovenia ranks 14'h among the Member States (EU average: 123.6). Data provided by the Slovenian Intellectual Property Office (SIPO) on national patent applications show accelerated annual growth over the past years (2008-2010: 19.2%), but it is yet to be seen how many of those applications will eventually result in a patent application at the EPO. Progress is more evident in Community trade marks, where in 2010 Slovenia filed 111 applications for trade marks per million population at the Office of Harmonisation for the Internal Market (OHIM) (EU average: 140). Slovenian applicants also registered 65 Community designs but this figure nevertheless lags behind the EU average (116 per million population). Slovenia is one of the three European countries that in the past five years recorded the most significant improvement of innovation performance, a synthetic indicator of the efficiency of the innovation system. According to the Innovation Union Scoreboard (IUS) 20 1 074 Slovenia ranked among the innovation followers for the second 71 The main question to public-administration institutions was whether or not they had introduced new or significantly improved services in the past three years (Innobarometer 2010, 2011). 72 Owing to different sample sizes. 73 See Indicator Intellectual property. consecutive year-lagging only slightly behind the EU average. In the past five years, Slovenia recorded the fastest growth of innovation performance after Portugal and Malta. Compared with the EU average, Slovenia's main advantage is in international co-publications75 where progress in the last five years was 100% above the EU average. This is to a certain extent due to the fact that scientific publications abroad are the main criterion for promotion to academic or scientific titles. Nevertheless, this is not a sufficient incentive for researchers to enhance collaboration with the business sector and the subjects considered in publications are not necessarily relevant for Slovenian enterprises. As a consequence thereof, the transfer of knowledge is hindered and this slows down the creation of patents and other forms of intellectual property. In fact, the IUS 2010 results reveal that Slovenia lags behind the EU average most significantly in intellectual property. In addition, the GDP share of income from the sale of patents and licences abroad is insignificant.76 The OECD also points to the problem of a low share of high-tech exports and the low number of fast-growing innovative enterprises as a result of insufficient transfer of knowledge and R&D into the business sector. To reduce this gap and enable more effective consideration of the needs of the business sector in research planning, the OECD proposes research vouchers that enterprises would use to purchase research services (OECD, Economic Survey Slovenia 2011). On the other hand, mention should also be made of the success of centres of excellence, which in the first two years of operation filed 48 patent applications. The centres of excellence, supported with public funds since 2005, encourage the concentration of the research potential on key priority areas as their selection is based on both scientific excellence and business interest (Bučar et al., 2010). Slovenia is not increasing investment in modern information communication technologies (ICT), while the use of the Internet is close to the EU average. Investments in ICT and their efficient use are of utmost importance for the competitiveness of the business sector and enable better access to e-services for the citizens. In 2006-2009, expenditure on ICT equipment and services did not increase significantly, accounting for 74 The Innovation Union Scoreboard 2010 differs slightly from the 2009 edition (formerly: European Innovation Scoreboard) and comprises 24 indicators of innovation performance related to human resources, the research system, financing, firm activities, intellectual property, innovation and economic effects. The indicators are available for various years between 2007 and 2009, which must be taken into account when interpreting the results as they do not show the outcome of the latest measures or the impact of the economic crisis on the innovation capacity of individual countries. 75 The number of international scientific publications submitted by Slovenian authors in cooperation with at least one non-EU author, measured per million population. 76 2008: 0.07% of GDP. 5% of GDP. This applies to both expenditure on IT and on communication equipment and services, with the latter accounting for two thirds of total expenditure on ICT. The gap behind the average share of GDP spent on ICT by EU countries (5.5%) is not narrowing. The new EU Member States all have a much higher level of expenditure than the average, particularly Estonia. In 201077 the Internet was regularly (at least once a week) used by 65% of the population aged 16-74, the same level as in the EU as a whole. Despite some progress over the past two years, Slovenia still lags significantly behind the EU average (by over 10 p.p.) as regards older Internet users (55-74 years). The gap behind the EU averaged narrowed more significantly in the share of Internet users with a low or medium level of education. Slovenia is above the EU average in other population groups (youth, middle-aged, highly educated).78 The use of advanced technologies and efficient broadband access, including fast mobile access to the Internet are important in terms of ICT development effects.79 Such technologies encourage open innovations and have a positive impact on the transformation of business processes and public services, on the creation and expansion of knowledge, on how employees cooperate in the business environment and on how citizens communicate with each other and with institutions. Slovenia is close to the EU average as regards the share of the population with broadband access (22.7% in 2010), while the share of users of e-services is equal to or above the average for the EU. However, Slovenia lags behind in the use of advanced services, such as e-banking, e-shopping and e-interaction with public administration. This gap is rather surprising since data on e-skills for Slovenia indicate relatively favourable results and Slovenians do not significantly differ from European users as regards their opinion on security risks associated with the use of e-services. A more modest use of advanced services is probably due to the risk-averse attitude of Slovenian Internet users, and partly to the lack of easy-to-use e-services for the average user. In the future, Slovenia could improve its innovation efficiency by increasing investment in R&D in the higher-education sector. A comparison among the countries by types of innovation system and sectors conducting R&D shows that in innovation-efficient countries80 R&D is focused on the business sector and the share of higher education in public expenditure on R&D performance is above 60%, with the exception of Germany (see Figure 14). Slovenia ranks among the group of countries with a predominant share of the business sector in R&D while 77 First quarter of 2010. 78 See Indicator Internet use and access. 79 Web 2.0 technologies such as cloud computing, mash-ups, social networks and other applications. 80 Measured by the Innovation Union Scoreboard 2010, in which the best results were achieved by Switzerland, Sweden, Denmark, Finland, Germany, the UK, Belgium and Austria. All these countries, except Germany, are in the upper-right quadrant. Figure 14:Archetypes of innovation systems in OECD countries, 2008 Public research-centered innovation system_ .i? 30 -c cu 20 10 Turkey 4 Canada Netherlands** Norway . Greec# Portugal ^^ Italy^ . Chi^ '^pair Australia^^ ' N.Zealand ^M^xicocelai Poland Hungary ^ ^ 4 S. Africa c^ Slovakia Russian Fed. Firm-centered innovation system Switzerland ♦ ♦ Denmark Austria Sweden ♦ Ireland U. Kingdom * ♦B^gium Finland Germany ► ♦ ♦ Japan d France ech R. Korea a ♦ China ♦ Luxembourg 10 University -centered public research Public lab-centered public research 20 30 40 50 60 70 80 90 K % share of firms in total R&D spendi ng (2008) Source: OECD Science, Technology and Industry Outlook 2010, 2010. innovation, so that they will be better used by companies (particularly service providers) to encourage both technological and non-technological innovation; by improving accessibility to capital and financial resources for innovative companies; by a gradual restructuring of the public-research sector toward greater involvement of higher education in research; and by greater orientation of institutes toward cooperation with the business sector. the share of higher education in public expenditure on R&D performance in 2008 was 38%. In 2009, the share rose to 41% but still remains the lowest in the EU (with the exception of Luxembourg). Although the type of innovation system of a given country is determined by the institutional set-up of R&D in the past, overall trends point towards a greater role of the business sector in R&D performance and undertaking research in the higher-education sector. In Slovenia, the low share of higher education in public expenditure on R&D performance is a result of the significant weight of institutions in public financing and systematically neglected research at the universities, where it is considered a "supplementary" activity. The solutions proposed in the draft Research and Innovation Strategy of Slovenia 2011-2020 (RISS)81 address certain problems highlighted in the present chapter, as well as in Development Reports from previous years. They refer to the efficiency of the innovation policy that is to be achieved by establishing a single system based on horizontal and cross-sector coordination among all players and by restructuring public agencies; by better management and transfer of R&D outcomes and technologies into the business sector; by modifying habilitation criteria to take into account the results of the transfer of knowledge into the business sector (e.g. patents); by better adjusting educational programmes to the needs of the business sector; by expanding justified expenditure for tax relief for R&D investment also to investment in the development of human resources and lifelong learning; by adjusting incentives to promote 1 Draft of 14 January 2011. 3. An efficient and less costly state SDS guidelines for the third priority cover three areas. First, structural reform of public finance comprising a reduction of general government expenditure as a share of GDP by at least two percentage points, restructuring expenditure in line with the priorities of the strategy and absorption of EU funds, and comprehensive tax reform aimed at removing burdens from labour, promoting competitiveness and employment, and simplifying the system. Second, increasing the institutional competitiveness and efficiency of government, which involves a reduction of state ownership in the economy, improvement of the quality of regulations and cutting red tape, introduction of public-private partnerships in infrastructural investment and public utilities, and increasing the efficiency of the civil service. And third, improving the functioning of the judiciary by making the system more effective and reducing court backlogs. 3.1. Quality of public finance After a considerable increase recorded in 2009, general government expenditure relative to GDP in 2010 stayed at the previous year's level. In 2009, general government expenditure as a share of GDP rose by 4.9 p.p. (2008: 44.1% of GDP) owing to its nominal growth (EUR 883 m) as well as to a reduction of GDP. In 2010, a nominal increase of expenditure of EUR 432 m and 1.2% growth of GDP kept general government expenditure at the previous year's level (49% of GDP). Increased spending in 2009 and 2010 was mainly a result of the operation of automatic stabilisers and counter-cyclical policy measures intended to mitigate the consequences of the economic crisis, as well as of measures taken by the government in the first half of 2008 that added pressure on expenditure growth. Social benefits in cash and kind, as well as subsidies, capital transfers and gross capital formation increased general government expenditure by 2.6 p.p. in 2009 and by 0.1 p.p. of GDP in 2010. Expenditure on social benefits in cash and kind rose by 2.1 p.p. in 2009 and by a further 0.4 p.p. in 2010 due to the operation of automatic stabilisers with increased expenditure on unemployment benefits and a growing number of beneficiaries in both years, and also due to the one-off allowance for socially deprived persons paid out in 2009. In 2010, expenditure growth was restricted by an intervention law that reduced adjustment to inflation. The increase in the share of expenditure on subsidies in 2009 (by 0.2% of GDP in 2009) following the adoption of special measures to mitigate the consequences of the economic crisis, which mainly focused on subsidies (job preservation, promotion of R&D, mitigating the problems of SMEs), continued in 2010, and the share of subsidies in GDP grew by another 0.3 p.p. In 2010, the volume of capital transfers and gross capital formation declined by 0.6 p.p. in relative terms from the high level of 2009 (5.8% of GDP), to the 2007 level (5.2% of GDP). Slovenia's expenditure on social transfers in 2010 was lower and expenditure on subsidies, capital transfers and gross capital formation was higher than the respective EU average levels. The GDP share of this last group of expenditure was also well above the EU average during the period of economic growth (2006-2008). Among other expenditure, a considerable increase was recorded in 2009 by compensations for employees (1.4 p.p.) following the introduction of the 2008 wage reform and growing employment. This expenditure would have been even higher had the government not simultaneously adopted measures to restrict employment, remuneration of work performance, promotion and adjustment to inflation, and postponed the elimination of a quarter of wage disparities. These measures continued in 2010, halting the share of expenditure on employees at the 2009 level (12.4% of GDP). The previous year's level (6.5% of GDP) was also maintained in expenditure on intermediate consumption due to restricted spending in 2010. The heavy deficit and, consequently, increased general government debt caused a 0.3 p.p. rise of interest expenditure. Following the Stability Programme, 2009 Update (2010), general government expenditure in 2010 (at 0.3 p.p. higher GDP growth) exceeded the anticipated GDP share by 0.1 p.p. The two main expenditure groups (social benefits and compensation of employees) achieved the planned level of growth while the increasing expenditure on intermediate consumption (up by 0.2 p.p.), and on current and capital transfers (up by 0.4 p.p.) ousted in particular gross capital formation, which was down by 0.3 p.p. of GDP. Interests decreased by 0.2 p.p. of GDP. Figure 15: General government expenditure by economic classification, % of GDP 12 # 8 2000 ■ 2005 1- 2008 I: 2009 ■ 2010 Kil IŽli fei ■ 5č ü E E C O C o 'td ro |E |E C (3 o cz -Q Source: SORS, Main aggregates of the general government, Slovenia 2007-2010, 31 March 2011, Non-financial accounts: S 13 General government, calculations by IMAD (2000 and 2005). 20 16 4 0 In terms of development, the changes in the structure of general government expenditure by function (COFOG) in 2009 were less favourable than in 2005-2008. As regards SDS development priorities, the share of expenditure on economic affairs supporting the development priority "A competitive economy and faster economic growth" fell by 0.6 p.p. in 2009 after growing steadily in 2005-2008, but still accounted for over 10% of total expenditure. The share of expenditure supporting the development priority "Efficient use of knowledge for economic development and high-quality jobs" (education and R&D in various areas) had recorded a downward trend since 2005 but in 2009 remained at the previous year's level and was 1 p.p. lower than in 2005. A more significant decrease was observed in the share of expenditure on R&D. To eliminate the consequences of the economic crisis that affected the business sector, the government approved anti-crisis measures, providing additional support to the activities falling under the above two development priorities (promoting economic competitiveness, maintaining jobs, strengthening R&D), yet these measures were financially too weak to change the structure of expenditure more radically. The share of expenditure for the development priority "An efficient and less costly state" (general public services, defence, public order and safety) was decreasing rapidly since 2007. In 2009 it held at the 2008 level and was 1.4 p.p. lower than in 2007. The share of expenditure supporting the priority "A modern welfare state and higher employment" (health and social protection) rose in 2009 Figure 16: General government expenditure by SDS priorities, % of total expenditure 60 50 40 30 20 10 ■ 2000 ■ 2005 i^ 2006 V 2007 1/ 2008 ■ 2009 E äE 1S<" C O IE o a CL J=-o THE FIRST PRIORITY: A competitive economy and faster economic growth Gross domestic product per inhabitant in purchasing power standards Real GDP growth Inflation General government debt General government balance Balance of payments Gross external debt Labour productivity Market share Unit labour costs Structure of merchandise exports by factor intensity Exports and imports as a share of GDP Foreign direct investment Entrepreneurial activity Share of non-financial market services Total assets of banks Insurance premiums Market capitalisation of shares Gross domestic product per inhabitant in purchasing power standards After more than a decade of Slovenia catching up with the EU average in terms of development, the development gap widened amidst the economic crisis in 2009 as well as in 2010, in our estimation. By recording higher economic growth rates than the EU average, Slovenia was narrowing the gap to the EU average in economic development, measured as GDP per capita, in the period up to 2008. With the economic crisis in 2009, the convergence process came to a halt, with GDP shrinking much more than on average in the EU. According to December's1 Eurostat figures, GDP per capita in purchasing power standards reached PPS2 20,700, or 88% of the EU-27 average, in 2009, which is a 3 p.p. decline relative to the previous year's level, and the same level as in 2006 and 2007. The 2009 interruption in narrowing the gap to the average development level in the EU was due to a significant productivity loss. This is also an area where, despite its sizeable gap with the EU, Slovenia has thus far made relatively little headway in implementing SDS, due to both inadequate rebalancing of the economy and an insufficient increase in value added per employee in individual sectors of the economy.3 Given that Slovenia recorded lower economic growth than the EU average in 2010, we estimate that its development gap to the EU average, measured in GDP per capita in purchasing power standards, widened further in 2010. Unlike in 2009, this was due to a relatively steep decline in employment, whereas labour productivity strengthened more than in the EU, precisely as a result of this huge drop in employment. Since 2005 (the period of implementation of SDS), the other new EU members have proved more successful in narrowing their gaps to the EU average than Slovenia in terms of GDP per capita in purchasing power standards. However, this was expected, to a certain extent, in view of the lower levels of GDP per capita in these countries relative to Slovenia (with the exception of Cyprus). Nonetheless, certain new EU Member States which are relatively close to Slovenia in terms of this indicator made significant headway in this regard (after 2005, particularly 1 Based on revised purchasing power standards for 2007-2009 and the latest data on GDP in national currencies and population size. 2 Purchasing power standard (PPS) - selection of currency and expression of results is a convention. In Eurostat's comparison, the results are shown in a »currency« called PPS. PPS is an artificial, fictitious, currency, which equals one euro at the level of the EU average. PPS or »EU-27 euro« is a »currency« that reflects the average price level in the EU-27. 3 See also the indicator Productivity. Slovakia, Poland and the Czech Republic, and over the last ten years, Hungary; see Table). Their progress was based on a substantial increase in productivity and the rebalancing of the economy towards high-technology activities,4 i.e. through developments that were much more intense in these countries than in Slovenia. With greater shares of foreign direct investment (FDI) in the economy (relative to GDP) than in Slovenia in 2005, in the run-up to the crisis, the majority of these countries also recorded relatively high inflows of FDI, which usually has a favourable impact on the technological restructuring of the economy (Damijan, Rojec, 2007). Compared with the countries that had been roughly on a par with Slovenia in terms of development at the beginning of the previous decade (Portugal, Greece and Malta), Slovenia recorded similar progress to that achieved by Greece (Greece and Slovenia had closed their gaps with the EU-27 by 9 p.p. and 8 p.p., respectively, by the end of 2009), while Malta and Portugal recorded even greater lags, by 3 p.p. and 1 p.p., respectively. In terms of GDP per capita in purchasing power standards, Slovenia thus overtook Portugal by 8 p.p. 4 See also Chapter 1.2. Increasing competitiveness and promoting entrepreneurial development. Table: GDP per inhabitant in PPS, volume indices, 1995-2009, EU-27=100 1995 2000 2005 2006 2007 2008 2009 EU-25 105 105 104 104 104 103 103 EU-15 116 115 113 112 112 111 110 Austria 135 131 124 125 123 124 124 Belgium 129 126 120 118 116 115 116 Bulgaria 32 28 37 38 40 44 44 Cyprus 88 89 91 91 93 97 98 Czech Rep. 73 68 76 77 80 81 82 Denmark 132 131 124 124 123 123 121 Estonia 36 45 62 66 69 68 64 Finland 108 117 114 114 117 118 113 France 116 115 111 109 108 107 108 Greece 84 84 91 93 91 93 93 Ireland 103 131 144 145 147 133 127 Italy 121 117 105 104 104 104 104 Latvia 31 37 49 52 56 56 52 Lithuania 36 39 53 55 59 61 55 Luxembourg 223 245 254 270 275 280 271 Hungary 52 55 63 63 62 64 65 Malta 86 84 78 78 77 78 81 Germany 129 118 117 116 116 116 116 Netherlands 123 134 131 131 132 134 131 Poland 43 48 51 52 54 56 61 Portugal 77 81 79 79 78 78 80 Romania N/A 26 35 38 42 47 46 Slovakia 48 50 60 63 68 72 73 Slovenia 74 80 87 88 88 91 88 Spain 92 97 102 104 105 103 103 Sweden 125 127 122 123 125 122 118 U. K. 113 119 122 120 116 115 112 Source: Eurostat Portal Page - National Accounts, 2010. Data for 2009 for Bulgaria by SORS. Note: N/A - not available. Figure: Relative change in GDP per inhabitant in PPS (in p.p.) in comparison with the EU-27 in 2009 Poland Malta Portugal Slovakia Hungary France Czech R. Cyprus Belgium Romania EU-15 Denmark U. Kingdom Slovenia Netherlands Sweden Latvia Estonia Finland Lithuania Ireland Luxembourg -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 In p.p. Source: Eurostat Portal Page - National Accounts, 2010. Data for 2009 for Bulgaria by SORS; calculations by IMAD. Note: In 2009, Austria, Bulgaria, Greece, Italy, Germany and Spain did not change their positions in comparison with the EU-27 relative to the previous year. Real GDP growth Driven by increased export demand and a relatively high contribution of inventory changes, GDP rose by 1.2%in2010. Positive signals of an upswing of economic activity started to appear in the second half of 2009, when foreign demand picked up, and strengthened through 2010. The nature of the upswing was emphasised during the year, as the recovery was limited largely to export-oriented and technologically stronger industries, while domestic factors held it back. Domestic consumption exceeded the level of 2009 by only 0.4%; only change in inventories had a significant contribution to growth, whereas other key aggregates were still lower than in the previous year (gross fixed capital formation) or saw only moderate growth (household and government consumption). The economic environment in EU countries was conducive to Slovenian exports, whereas growth of exports to non-EU countries was much more subdued. Following a plunge in 2009, goods exports rose 10.2% in real terms in 2010. The recovery was driven by the recovery in Slovenia's main trading partners in the EU, but the surge subsided in the second half of the year as global trade slowed down, temporary incentives tailed off and austerity measures kicked in to curb general government deficits. In the second half of the year, the contribution of the other group of countries accounting for a substantial portion of Slovenia's exports - the countries of the former Yugoslavia - turned positive. Exports of road and rail transport services saw the biggest rise in services exports, in line with the increase in goods exports, but overall services exports dropped 1.1% in real terms. Domestic consumption exceeded the 2009 level by only 0.4%, with construction investment recording the biggest drop compared with 2009. Household consumption inched up (0.5%), but the current balance of payments for 2009 (in particular in the segment of the household travel trade) does not yet represent a real basis for the calculation as the figures are not yet final. We estimatethatthe positiverates of householdconsumption in 2010 do not mirror an actual strengthening of the expenditure of Slovenian households.1 Growth in general government consumption, meanwhile, slowed further (to 0.8%) due to austerity measures. On the other hand, there were positive signals from business investment figures, as foreign demand and capacity utilisation increased. Investment in machinery and equipment exceeded the 2009 level by 6.8%. Our assessment, however, is that the situation on financial markets started to exert an excessive drag on this segment of investment 1 This is also indicated by labour-market data on employment and wages, revenue in retail and wholesale trade and other household expenditure indicators for last year. as the year progressed.2 After net borrowing with banks in the first half of the year, companies deleveraged in the second half of the year. At the same time, banks extended a significant proportion of credit to refinancing existing loans and to the construction sector; allocations for writedowns and provisions surged by one half over the year before. The decline in construction investment (15.7%) was slightly lower than in 2009 (19.2%). Residential construction recorded the biggest fall from the peak of construction activity in October 2008, followed by civil-engineering projects and non-residential construction. Apart from investment in machinery and equipment, economic growth was also driven by changes in inventory (1.6 p.p.), which rose after a steep decline in 2009. Given the weak domestic demand, export growth outpaced import growth last year. Goods imports rose 7.7% in real terms. The structure of economic growth, largely based on exports, which have a high import component, meant that intermediary goods were the fastest growing segment of imports. Services imports exceeded the 2009 level by only 1.1%. Differences in the pace of recovery of foreign and domestic demand were also evident in sectoral results. Manufacturing (8%) and transport (5.7%) recorded the fastest growth in value added as exports rose. The adverse situation in construction and the labour market, on the other hand, held back recovery in retail and wholesale trade, and led to a further decline in hotels and restaurants, and in the architectural activities segment of business services. In public services, one of the few activities in which the number of employees grew last year, growth in value added plummeted in health and social care (from 4.9% to 0.5%), while it remained at a similar rate as in the previous year in public administration, defence, social protection and education. The economic recovery was slower than in the euro area and the EU. In the euro area, economic growth averaged 1.7% last year (EU: 1.8%). After a deeper fall than in the EU in 2009, the decline in gross fixed capital formation in 2010 was again more pronounced than on average in the EU due to the continued severe decrease in construction investment. For the two years taken together, the severity of the decline in construction was second only to Bulgaria in the EU. The growth in household consumption was also somewhat lower than in the EU. The contribution of external trade to economic growth was similar, but export growth in the euro area outpaced Slovenia's, which we deem to be a consequence of the technologically less favourable structure of Slovenia's exports and the significant importance of the markets of the former Yugoslavia among non-EU markets, for which the recovery was slow last year. Change in inventories, however, made a significantly bigger contribution to GDP growth than in the euro area. 2 This is also indicated by the Results of the Survey of Demand for Loans by Nonfinancial Companies by Activities, which was released in October 2010 by the Bank of Slovenia. Table: Contribution of individual expenditure components to GDP growth in Slovenia 1996 2000 2005 2006 2007 2008 2009 2010 Real GDP growth, in % 3.6 4.4 4.5 5.9 6.9 3.7 -8.1 1.2 Contribution to GDP growth, in p.p. External trade balance (export-import of goods and services) 0.3 2.5 2.2 0.2 -2.0 -0.4 2.0 0.8 - Exports of goods and services 1.4 6.2 6.1 7.8 9.1 2.3 -11.9 4.5 - Imports of goods and services 1.1 3.7 4.0 7.6 11.2 2.7 -13.9 3.8 Total domestic consumption 3.3 1.8 2.3 5.7 8.9 4.2 -10.1 0.4 - Household consumption 1.9 0.7 1.5 1.6 3.5 1.5 -0.4 0.3 - General government expenditure 0.5 0.6 0.6 0.8 0.1 1.1 0.5 0.2 - Gross fixed capital formation 1.8 0.6 0.9 2.6 3.4 2.3 -6.2 -1.6 - Change in inventories -1.0 0.0 -0.7 0.7 1.8 -0.8 -4.0 1.6 Source: SI-TAT Data Portal - National Accounts. Gross domestic product, annual data, Gross domestic product by quarters, 2011; IMAD calculations.. Figure: Recovery of GDP in Slovenia and its key trading partners ----Germany ---------France -----Ital^ --A-- Austria, 101 o 100 0 99 CO ^^ 98 (N 97 ^^ 96 ■u 95 -a ^ 94 93 92 nos 91 a 90 - Croatia - Slovenia -EMU Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Source: Eurostat Portal Page - Economy and Finance - National Accounts, 2011. Q4 10 Inflation Consumer price growth was at 1.9% in 2010, similar to the level in the previous two years. Sluggish economic activity was reflected in moderate price growth in most index groups and in low core inflation, with various core inflation indicators hovering between 0% and 1.0% at the end of the year. However, the growth rates of energy prices and prices of excise duty goods were considerably higher. Prices of non-processed food (vegetables and fruit) also saw relatively high growth, which differed significantly from the general price growth and was also significantly higher than in the euro area. Growth in prices of liquid fuels for transport and heating, natural gas and district heating, resulting from higher oil prices on the global market, and higher electricity prices, along with higher excise duties for some of these products, contributed 1.5 p.p. to 1.9% inflation, with higher excise duties accounting for around 0.6 p.p. The total effect of higher excise duties and other tax changes1 amounted to between 0.6 p.p. and 0.7 p.p., similar to the level in 2009 (0.8 p.p.). One important area of reduction in retail prices last year was a decline in the prices of primary school meals due to the introduction of subsidies, which reduced the amount to be paid by parents. Inflation was thus lower by 0.7 p.p. at the end of the year. In addition to commodity prices, food prices also increased significantly on the global market last year, which was reflected during the year in industrial producer prices and, to a small extent, in retail prices. Last year, food prices on the global market recorded even higher growth (39.9%) than prices of energy commodities (33.3%),2 but this growth had not yet been passed on into retail prices by the end of last year. After the 2009 drop, relatively strong growth was recorded for prices of non-processed food (vegetables 17.1%, fruit 8.1%), while prices of processed food fell somewhat in 2009-2010.3 In other euro-area countries, last year's food price rises also largely resulted from higher prices of non-processed food, with processed food prices (including tobacco, alcohol and non-alcohol beverages) recording lower growth. In Slovenia, a more pronounced pass-through of commodity price shocks into retail prices of processed food was first seen at the beginning of 2011, probably due to the fact that the terms of trade between producers and distributors tend to be set at that time of the year. On the side of food manufacturers in the euro area, a spillover of higher commodity prices was already observed at the end of 2010, with prices 1 0.3 p.p. excise duties on all other energy sources; 0.3 p.p. excise duties on alcohol and tobacco; 0.1 p.p. the net effect of certain other tax changes. 2 Source: IMF; conversion into euro prices by IMAD. 3 Processed food: bread and cereals, milk, dairy products and eggs, oils and fats, sugar and confectionery, food products n.e.c; for comparison with euro-area inflation, the processed food group also includes non-alcoholic and alcoholic beverages and tobacco products. in the manufacture of food products increasing by 4.2%; the growth of these prices in Slovenia had been strengthening throughout 2010 but was still low at the end of the year (1.3%). Prices of imported food also recorded substantially higher growth (14.6%). Energy prices were also the main driver of administered price rises last year and the government once again stepped in by freezing prices of public utility services. Last year, administered prices rose by 11.1%, to our estimate. Looking at prices under various regimes of control, last year saw outstanding growth in prices that are, due to the model-based formulation, only under indirect government control (liquid fuels for transport and heating, district heating, natural gas), which increased by 14.3% last year. Administered prices under direct government control rose by 0.8%.4 The calculation also takes into account growth in public utility prices, which were frozen by the government in August 2010. In doing so, the government intervened in an area of regulation that had otherwise been the responsibility of local communities since August 2009. Public utility prices had risen by 6.5% by the end of August 2010, and continued to show significant growth having already increased by 9.8% in 2009. Inflation in Slovenia was at the euro-area average in 2010, but its structure was somewhat different. As in Slovenia, inflation in the euro area measured by the HICP5 totalled 2.2% at the end of the year and was also significantly affected by weak economic activity. As in Slovenia, price growth in the euro area was marked particularly by higher energy prices and tax impacts, but the contribution of these factors was greater in Slovenia than in the euro area. The contribution of energy price rises to inflation in Slovenia was greater due to a greater share of these prices in the structure of household consumption, but also due to somewhat higher growth (gas and district heating, in particular). Excise duties and other taxes also increased more than in the euro area (contributing 0.6-0.7 p.p. to inflation in Slovenia and around 0.3 p.p. in the euro area). The euro area saw a smaller increase in prices of non-processed food and a greater increase in prices of non-energy industrial goods, which declined in Slovenia, as they had in 2009, particularly due to the impact of lower prices of transport vehicles. Prices of services, which lag behind the euro-area average most and had been strengthening faster than in the euro area in previous years, stagnated last year (+0.1%; an increase of 1.3% in the euro area), as a result of the above-mentioned reduction in prices of school meals. Slovenia would have otherwise recorded similar growth in services prices to those in the euro area. 4 The administered prices plan predicted that these prices would increase by less than 0.4%. 5 HICP - Harmonised Index of Consumer Prices is used for comparison between consumer price rises in the euro area and the EU. Table: Annual price rises in Slovenia and in the euro area, in % 1995 2000 2005 2006 2007 2008 2009 2010 Consumer prices (CPI) 9.0 8.9 2.3 2.8 5.6 2.1 1.8 1.9 Goods 7.1 8.8 2.0 2.1 6.0 1.3 1.9 2.7 Services 15.9 9.2 3.0 4.3 4.8 3.8 1.6 0.0 Administered prices 10.0 16.0 7.7 2.1 7.2 -7.8 12.6 11.5 Energy 8.2 18.9 9.8 3.7 9.6 -11.9 14.7 14.3 Other 11.4 12.0 3.0 -2.1 1.5 0.4 4.0 0.7 Consumer prices - harmonised index of consumer prices (HICP) Slovenia N/A 8.9 2.4 3.0 5.7 1.8 2.1 2.2 Euro area 2.5 2.5 2.2 1.9 3.1 1.6 0.9 2.2 Source: SI-STAT Data Portal - Prices - Consumer price indices, annual data (SORS); calculations by IMAD; Eurostat Portal Page - Economy and Finance - Prices - Harmonised index of consumer prices, 2011. Note: N/A - not available. Figure: Y-o-y consumer price rises in Slovenia and in the euro area (HICP) 10 8 ^ 6 ■■■r........!........r.......7........r........!.......7........r..... £! ] i i i 4 -4........!........t.......j........i........i.......I 2 HICP core inflation - Slovenia HICP core inflation - Euro area ........r.......1........!........1........r.......r- 112 Source: Eurostat Portal Page - Economy and Finance - Prices - Harmonised index of consumer prices, 2011. 0 General government debt General government debt as a percentage of GDP was estimated at 38.0% at the end of 2010.1 General government debt has declined steadily since 2000, reaching 21.9% of GDP in 2008. Amid relatively low general government deficits, the decline in the debt-to-GDP ratio in that period resulted from changes in the debt structure (away from inflation indexed debt instruments) on the one hand, and relatively high GDP growth on the other. In 2009, the debt-to-GDP ratio surged by 12.1 p.p. due to the increase in the deficit and pre-financing of the borrowing requirement in 2010. The proceeds were used to ease the liquidity conditions of the banking system in the form of government deposits. In 2010, general government debt increased by 3.5 p.p. of GDP, mainly due to deficit financing (5.5 p.p. of GDP). The increase of general government debt was smaller than the amount of the deficit, which can be explained by pre-financing of the future borrowing requirement in 2009. The bulk of the general government debt (non-consolidated debt) is from central government (96% of the total at the end of 2010). The share of non-consolidated debt at the local-government level has also increased. It has nearly doubled in the last three years, but is nevertheless still fairly low.2 Long-term securities also accounted for the bulk of central government borrowing in 2010. In the first quarter of 2010, Slovenia issued a five-year and a ten-year bond (totalling EUR 1 bn and EUR 1.5 bn, respectively). Most of the central-government debt was long term (97% at the end of 2009),3 as a result of the strategy of issuing mainly 10-year maturity fixed coupon bonds denominated in euros. Slovenia's central government debt maturity profile exhibits a fairly uniform structure and is spread out without major concentration of debt maturing in a single year. Publicly guaranteed debt continued to grow last year. After increasing significantly in 2009,4 publicly guaranteed debt also continued to grow last year, albeit at a somewhat slower pace; at the end of 2010, it amounted to EUR 7.7 bn (21.5% of GDP). Publicly guaranteed debt thus rose by 9 p.p. of GDP over the last two years (general government debt by just over 15 p.p. of GDP). Even though state guarantees do not directly increase general government debt until they are called up, their very scope and the estimate of probability of being called up can affect the way a country is perceived by financial markets, and this can make borrowing more expensive by widening spreads. The Slovenian government bond yield spread with respect to German benchmark government bonds is wider than before the crisis. The yield of the Slovenian ten-year government bond fell slightly, below 4%, at the end of 2009 and remained at that level during the first eleven months of 2010. It increased again in December, averaging 4.11% that month. Until April 2010, the Slovenian government ten-year bond yield spread with respect to German benchmark government bonds hovered below 100 basis points, which was above the pre-crisis levels. On the back of the Greek financial crisis, the yield spread widened in Slovenia in the second half of 2010, as was the case in most other euro-area members, but in Slovenia the increase was much smaller than in some high-risk countries of the euro area. Despite the relatively large increase, the debt-to-GDP ratio in Slovenia remains among the lowest in the euro area. The debt-to-GDP ratio of Slovenia's government is estimated to have been the sixth lowest in the EU at the end of 2010. Although Slovenia is still ranked among the countries with relatively low debt-to-GDP ratios, it has drawn closer to the EU average in the last two years regarding the relative increase in its debt-to-GDP ratio, while it has already exceeded the increase in the euro-area average. 1 SORS (March 2011). 2 Local government borrowing is otherwise constrained by the Financing of Municipalities Act stipulating that a local government's debt in a given year should not exceed 20% of the previous year's revenue and debt-servicing expenditure should not exceed 5% of the previous year's revenue. 3 Report on the management of public debt in Slovenia (Poročilo o upravljanju z javnim dolgom Republike Slovenije za leto 2009) (July 2010). 3 Particularly due to guarantees in the amount of EUR 2 bn provided by the government to domestic banks (see also Development Report 2010, 2010). Table : Consolidated general government debt by sub-sectors, Slovenia EUR m 2000 2006 2007 2008 2009 2010 1 General government, total1 4,886 8,204 7,981 8,180 12,449 13,704 1.1 Central government 4,804 8,118 7,904 8,091 12,110 13,171 1.2 Local government 60 236 256 354 523 626 1.3 Social-security funds 97 3 3 3 2 52 1.4 Consolidated debt among sub-sectors -74 -153 -182 -268 -187 -146 as a % of GDP 1 General government, total1 26.4 26.4 23.1 21.9 35.2 38.0 1.1 Central government 26.0 26.1 22.9 21.7 34.2 36.5 1.2 Local government 0.3 0.8 0.7 0.9 1.5 1.7 1.3 Social security funds 0.5 0 0 0 0 0.1 1.4 Consolidated debt among sub-sectors -0.4 -0.5 -0.5 -0.7 -0.5 -0.4 Source: General government debt, Slovenia, 1994-2010 (SORS), 2011. Note: 1 Data on debt are consolidated (reduced by the amounts of debt between government units). Figure: Consolidated general government debt by EU Member States, 2010 (forecast), as % of GDP 160 140 120 100 > 80 60 40 20 0 ri li^ cii TO fD -O eu C cu N E C .12 u ii m CT Source: Source: AMECO data base, 2011. General government balance The general government deficit was only slightly reduced in 2010, remaining at a high level. The general government deficit1 for 2010 is estimated at 5.5% of GDP, down 0.5 p.p. on the 2009 level.2 Expenditure growth (1.8%) was much slower than in 2009 (5.4%), when the increase was the consequence of automatic stabilisers, a wage reform and anti-crisis measures. Nevertheless, as general government revenue increased by 2.8%, the deficit was not significantly reduced. The general government deficit was generated primarily at central government level3, much as it was in the years before, but the deficits of local government (0.4% of GDP) and social-security funds (0.4% of GDP) were also relatively high compared to the previous mid-term period. The revenue-to-GDP ratio rose by 0.4 p.p. in 2010, mostly on account of transfers and other revenues. Transfers (funds from the EU budget) and other general government revenues accounted for two-thirds of the increase in revenue (1.8 p.p.), while tax revenues only represented a third of the total (1 p.p.). Among key tax categories, the share of revenue from social-security contributions remained level over the year before (15.2% of GDP). The share of taxes on production and imports meanwhile dropped by 0.1 p.p. to 14.0% of GDP. Only excise duties and value-added tax rose slightly in nominal terms, the former due to higher excise rates (while the quantity of excise products sold decreased). Current taxes on income and property dropped by 0.2 p.p. Relative general government expenditure remained level with respect to the year before in 2010 (49% of GDP). Social benefits in cash and kind, subsidies and interest expenditure rose in 2010, whereas investment and investment transfers were the main factors driving expenditure down. The share of social benefits in cash and kind rose by 0.4 p.p. largely due to the rising number of the unemployed and socially disadvantaged, as increases in pensions and social transfers were limited by an emergency act. The continued implementation of anti-crisis measures increased the share of expenditure on subsidies by 0.3 p.p. Interest payments were up 0.3 p.p. as government borrowing rose. Compensation of employees remained at the 2009 level in relative terms despite a 1.5% increase in the number of employees in 1 ESA95 methodology. 2 The decline in GDP also affected the increase in the share of aggregates in 2009. 3 In the entire period 2000-2010, the central government accounted for over 90% of the total deficit. the general government sector.4 This was underpinned by a postponement of the continuation of the public-sector wage reform (payment of the third and fourth quarters of the sum for the elimination of wage disparities) and a restrictive wage policy in the public sector. Expenditure on intermediate consumption also remained at the 2009 level. Government expenditure contracted only in capital transfers and expenditure on gross capital formation, where it was down by 0.6 p.p. of GDP. The worsening of Slovenia's fiscal position was milder than on average in the EU in 2009.5 In the crisis year of 2009, the general government deficit rose by 4.5 p.p. (to 6.8% of GDP) in the EU and by 4.3 p.p. (to 6.3% of GDP) in the euro area as a consequence of automatic stabilisers and stimulus measures. All EU members recorded deficits in 2009 and as many as 21 breached the 3% of GDP6 ceiling. 4 It should be noted that the number of civil servants (i.e. employees in the civil part of public-administration bodies) continued to decline in 2010 (-2.5%, or -2.3% excluding the reassignment of civil servants in the newly founded agency). 5 The latest available data for EU countries are for 2009. In Slovenia, the general government deficit as a share of GDP increased by 4.2 p.p. in 2009. 6 The Stability and Growth Pact, which applies to all EU Member States, stipulates that the general government deficit may not exceed 3% of GDP. Table: General government revenue, expenditure and balance according to ESA95, Slovenia, as % of GDP 1995 2000 2005 2006 2007 2008 2009 2010 General government revenue 44.3 43.0 43.8 43.2 42.4 42.3 43.1 43.5 General government expenditure 52.6 46.7 45.3 44.6 42.5 44.1 49.0 49.0 General government deficit -8.3 -3.7 -1.5 -1.4 -0.1 -1.8 -6.0 -5.5 Central government -7.9 -3.2 -2.2 -1.3 -0.1 -1.2 -5.0 -4.7 Local government 0.2 0.0 0.0 -0.1 -0.1 -0.6 -0.5 -0.4 Social-security funds -0.8 -0.5 0.8 0.1 0.2 0.0 -0.4 -0.4 Source: SI-STAT Data Portal - Economy - National accounts - Main aggregates of the general government, First release (SORS), March 31, 2011 (for 2006-2010). Non-financial accounts: general government S-13; IMAD calculations (for 1995, 2000, 2005). Figure: General government balance, 2000 and 2009, as % of GDP 8 4 0 -4 Q- Q ^^ -8 <-12 -16 Source: Eurostat, General Government deficit (-) surplus (+), EDP, January 2011. Balance of payments The deficit of the current account of the balance of payments narrowed further in 2010, but for different reasons from those applying in 2009. After shrinking substantially in 2009 (from 6.7% to 1.5% of GDP), the current account deficit also declined last year (1.1% of GDP). In 2009, the fall had mainly been a result of a lower deficit in merchandise trade, which had already widened slightly in 2010 due to the deterioration in terms of trade. The narrowing of the deficit in 2010 was a consequence of a better balance of current transfers, which turned from a deficit into a surplus due to increased absorption of EU funds, and a smaller deficit in investment income after Slovenian enterprises abroad recorded lower outflows of capital from reinvested earnings and dividends than in 2009, according to the Bank of Slovenia estimates.1 The merchandise deficit increased in 2010 due to deterioration in the terms of trade. The merchandise deficit recorded EUR 973.8 m in 2010, an increase of EUR 274.7 m over 2009. Exports otherwise recorded much higher real growth (10.2%) than imports (7.7%), but the price effect, which had contributed to a decline in the merchandise trade deficit in 2009, worked towards its increase in 2010 (see Figure). Amid significant rises in energy and non-energy commodity prices, import prices saw much higher growth (6.5%) than export prices (3.1%), and the terms of trade deteriorated by 3.2% (having improved by 4.7% in 2009).2 Broken down by end-use product groups, the nominal deficit widened due to a higher deficit in trade in intermediate goods under the impact of recovering domestic production in manufacturing and, particularly, commodity price rises. The trade deficit in investment goods shrank as a result of domestic investment activity, which was still weak. The surplus in consumer goods trade increased, as passenger cars and durable goods, the two most important components in the structure of consumer-goods trade, recorded higher growth in exports than imports last year. This was related to strong foreign demand for cars produced by the Slovenian car manufacturer (due to the subsidies in certain EU countries to stimulate car purchases, particularly in the first half of 2010) on the one hand, and modest consumption by Slovenian households on the other. The surplus in the balance of services narrowed slightly again. The surplus in the services balance declined by EUR 56.9 m to EUR 1,057.4 m, mainly due to a higher trade deficit in licences, patents and copyrights. After contracting in 2009, the trade surplus in transport services increased somewhat last year. The trade surplus in travel services was also slightly higher after the 2009 decline.3 The deficit in factor incomes shrank again, largely due to a lower deficit in investment income and a higher surplus in income from labour. The balance of factor incomes recorded a deficit of EUR 596.6 m in 2010, EUR 185.6 m than in 2009. The deficit in investment income shrank as a consequence of lower net outflows of income from equity capital of direct investment (reinvested earnings, see Note 1) and net interest payments on foreign loans. Net interest paid by commercial banks diminished the most, as net interest payments mainly declined due to the repayment of the domestic banking sector's debt. Lower net outflows were also recorded for the Bank of Slovenia's interest payments into the Eurosystem. As a result of bonds issued by the government sector and banks, interest payments abroad exceeded interest received from portfolio investment, in contrast to previous years when Slovenia had recorded net inflows from interest on this type of investment. As in 2009, the inflow of income from labour also increased last year, still mainly as a result of a smaller outflow of foreign workers' income abroad. The deficit in the balance of current transfers turned into a surplus due to improved net drawing of EU funds. After five years of deficit, the current account balance ran a surplus of EUR 103.9 m in 2010 (a deficit of EUR 158.6 m in 2009). The improvement in the last two years was mainly a result of increased absorption of EU funds. Slovenia's state budget, which as recently as in 2007 and 2008 still recorded a net deficit4 against the EU budget, enjoyed a net budgetary surplus of EUR 155.7 m in 2009, which expanded to EUR 326.4 m in 2010 (with 69.7% realisation of planned inflows). Within other government transfers, net payments of taxes and contributions abroad declined most sharply. The deficit for private-sector transfers remained roughly at the level of the preceding year. 1 The current balance of payments data on reinvested earnings are still an estimate of the Bank of Slovenia based on the average values for several years. The actual data will be included in the balance of payments after the annual accounts of companies have become available. We estimate, however, that the net outflow of capital from reinvested earnings according to actual data is also not likely to reach the high level of 2009 in 2010 (EUR 335 m), as a result of disinvestment of Slovenian companies abroad. 2 Terms of trade according to the national accounts statistics. 3 Due to the newly calculated (lower) values of exports/imports of travel services based on new data on overnight stays and average tourist consumption, the Bank of Slovenia announced a revision of the balance of payments (the previous revision had been made last August). November's 2010 balance of payments already includes the new calculations for 2010, while the new figures for 2008 and 2009 have not yet been taken into account. Comparisons between these periods are therefore not reliable. Other items (transport services and the group of other services), for which the BS has only updated the sources of data, underwent no noticeable change. 4 Deficits of EUR 64.7 m and EUR 8.7 m in 2008 and 2007, respectively. Table: Current account of the balance of payments and terms of trade, Slovenia, 1995-2010 1995 2000 2005 2006 2007 2008 2009 2010 Current account, % of GDP -0.3 -2.7 -1.7 -2.5 -4.8 -6.7 -1.5 -1.1 Goods -4.7 -5.7 -3.6 -3.7 -4.8 -7.1 -2.0 -2.7 Services 2.9 2.3 3.2 3.2 3.0 4.0 3.1 2.9 Labour and investment income 1.0 0.1 -1.0 -1.4 -2.3 -2.8 -2.2 -1.7 Current transfers 0.5 0.6 -0.3 -0.6 -0.7 -0.8 -0.4 0.3 Real growth rates of trade in goods and services, % Exports of goods and services 1.1 13.1 10.6 12.5 13.7 3.3 -17.7 7.8 Imports of goods and services 11.3 7.1 6.6 12.2 16.7 3.8 -19.7 6.6 Terms of trade, index Goods 103.1 96.2 97.6 99.6 100.6 98.2 104.7 96.8 Services 100.6 102.1 100.0 99.5 102.7 99.5 99.9 101.7 Source: SI-STAT data portal - National accounts, 2011; Financial accounts, External economic relations (Bank of Slovenia), 2011; calculations by IMAD. Figure: Contribution of quantities and prices to the balance of trade in goods, in EUR m, 2007-2010 400 200 I Prices ^■Quantities -Total -200 ■iS -400 -600 -800 Q107 Q2 Q3 Q4 Q1 08 Q2 Q3 Q4 Q1 09 Q2 Q3 Q4 Q1 10 Q2 Q3 Q4 Source:SI-STAT data portal - National Accounts, 2011; calculations by IMAD. 0 Gross external debt Growth in gross external debt slowed in the last two years. Slovenia's gross external debt was EUR 40.9 bn at the end of 2010, up EUR 0.6 bn from December 2009 (and up EUR 1.0 bn in 2009). In the last two years, its growth was thus much smaller than in 2007 and 2008 when it was the highest to date (see Table). Besides the increase in general government debt, which made the greatest contribution to the total growth of gross external debt in both 2009 and 2010, the debt of affiliated enterprises also increased, after shrinking in 2009, while the debt of the banking sector continued to fall. The gross external debt of the general government rose by EUR 1.6 bn in 2010 (by EUR 2.8 bn a year earlier), to EUR 8.2 bn, representing 20.0% of total external debt (16.3% at the end of 2009). After repaying loans in 2009, Slovenian foreign investment enterprises also increased their debt to foreign parent companies last year.1 The debt of affiliated enterprises thus rose by EUR 0.6 bn, to EUR 4.6 bn. The bulk of this debt stock was generated by nonbank financial institutions involved in financial leasing, the rest by non-financial corporations (enterprises). The debt of the so-called other sectors, in which enterprises prevail, rose only marginally last year, by EUR 88 m to EUR 9.7 bn, after a significant increase in 2009. With strong growth in imports, the otherwise modest corporate debt growth mainly resulted from a higher volume of short-term commercial credits (up EUR 0.4 bn to EUR 3.7 bn), while enterprises continued to make net repayments of foreign loans. Given the limited access to foreign sources of finance, domestic commercial banks also net repaid foreign liabilities in 2010. Their external debt declined relative to the end of 2009 (down EUR 0.4 bn to EUR 16.0 bn). Total net repayments (of loans and deposits) amounted to EUR 1.5 bn, less than half the levels recorded in 2009 (EUR 2.8 bn). Commercial banks' debt as a share of total gross external debt accounted for 39.2% at the end of last year (40.8% at the end of 2009). The Bank of Slovenia's debt declined for the second successive year (by EUR 1.2 bn to EUR 2.4 bn). The bulk of the BS debt is short-term, in the form of cash and deposits. The long-term debt of the BS in the form of other debt liabilities remained at the previous year's level. In the structure of gross external debt, public and publicly guaranteed debt increased once again while non-guaranteed private debt declined. Private sector debt, particularly the debt of domestic commercial banks, had started to decline in 2009 and continued to do so in 2010 (by EUR 1.9 bn to EUR 24.4 bn), though the repayments were smaller. Public and publicly guaranteed debt also strengthened further last year, albeit at a somewhat slower pace than in 2009. Public debt2 expanded by EUR 1.6 bn and publicly guaranteed debt3 by EUR 0.6 bn (to a total of EUR 16.5 bn; within that, publicly guaranteed debt EUR 8.3 bn). Public debt and publicly guaranteed debt combined accounted for 40.3% of gross external date at the end of 2010, which is the highest figure to date. The 2010 expansion in public and publicly guaranteed debt (which is mainly long-term) also increased the share of long-term debt in total debt. Excluding liabilities to affiliated entities, which are not tracked for maturity, long-term debt represented 76.6% of total debt at the end of 2010, 3.4 p.p. more than a year earlier. Despite its strong borrowing in previous years, Slovenia remains among the least indebted countries in the euro area. At the end of 2010, Slovenia's gross external debt represented 113.4% of GDP (0.4 p.p. less than a year earlier), which is much less than the average debt in the euro area, which had reached 205.3% of GDP in 2009. However, this comparison alone is not sufficient to assess Slovenia's debt repayment risk, as the level of external debt of a country needs to be judged in the context of broader macroeconomic and other circumstances such as potential economic growth, the competitiveness of the economy, the interest rate for raised loans, debt structure, etc. ' See the indicator Foreign direct investment. 2 External public debt is generated with borrowing of the institutional government sector (according to ESA 95) on foreign financial markets. The government may borrow from international financial institutions, foreign governments or government agencies, foreign commercial banks, and even from private lenders in the event of an issue of transferrable securities on a foreign financial market. 3 Publicly guaranteed debt is a liability of a private legal entity, but payment is guaranteed by the state. Publicly guaranteed debt includes Bank of Slovenia liabilities to the Eurosystem incurred by the transfer of monetary policy from the BS to the ECB. Table: Slovenia's gross external debt position, end of the year, in EUR m, 1995-2010 1995 2000 2005 2006 2007 2008 2009 2010 Total gross external debt 4,275 9,491 20,496 24,067 34,783 39,234 40,276 40,897 Short-term debt 1,470 2,283 4,573 5,239 10,733 11,595 9,699 8,503 Public & publicly-guaranteed debt 0 0 70 77 3,588 3,603 3,360 2,145 Private non-guaranteed debt 1,470 2,283 4,503 5,162 7,145 7,992 6,339 6,358 Long-term debt 2,083 5,895 14,509 17,710 20,058 22,820 26,512 27,771 Public & publicly-guaranteed debt 1,178 2,883 3,729 4,275 4,508 5,533 10,613 14,351 Private non-guaranteed debt 905 3,012 10,780 13,435 15,550 17,287 15,899 13,420 Liabilities to affiliated entities 722 1,312 1,415 1,119 3,992 4,818 4,065 4,624 Public & publicly-guaranteed debt 0 0 0 0 0 0 0 0 Private non-guaranteed debt 722 1,312 1,415 1,119 3,992 4,818 4,065 4,624 Source: Bulletin of the Bank of Slovenia, 2011. Figure 1: Gross external debt in euro area countries, at the end of 2009, in % of GDP 600 500 Q_ 400 Q o 300 200 100 0 I I I I I I I I I I I I I J2 £ C JŠ £ Source: national central banks; calculations by IMAD. Figure2: Structure of Slovenia's gross external debt by sector 100 90 80 70 60 : 50 40 30 20 10 0 I 11 J I Affiliated entities O Other sectors ■■ Commercial banks ■ Bank of Slovenia I Government sector 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bank of Slovenia, calculations by IMAD. Labour productivity A severe drop in labour productivity1 in 2009 was followed by subdued growth in 2010, but, given the weak economic recovery, this was largely a consequence of lower employment. Labour productivity in Slovenia averaged EUR 25,452 per employee in 2010, up 3.4% over the year before. While the decline in economic activity had been much more severe than the drop in employment in 2009 (-8.1% compared to -1.9%), employment dropped further in 2010 (-2.2%) even as economic activity picked up (1.2%). In 2009, as in 2010, the increase in hourly productivity2 was much higher than the rise in value added per employee. This is due to the steeper decline in the number of hours worked relative to employment, which may be attributed to the implementation in 2009 of emergency laws designed to preserve jobs.3 Productivity rose across most industries in 2010. The biggest growth rates were recorded in mining, manufacturing and transport, warehousing and communications. In construction and some service industries (financial intermediation, and the real estate, lease and business services sector), meanwhile, productivity continued to stagnate. In manufacturing, where the decline in productivity was very steep in 2009 (-8.1%), productivity surged by 15.3% last year, due to the baseline effect as well as higher activity buoyed by foreign demand; manufacturing is the most export-oriented segment of Slovenia's economy. Employment in manufacturing continued to drop, but at a slower pace than in 2009. Only mining saw faster growth in productivity (19.6%), largely due to the significant decline in the number of employees as a result of gradual mine closures, and partially due to higher value added in the industry. The strong decline in productivity in construction (-5.4%) is attributed to the drop in activity, which is also evident in the sagging demand for workers. As expected, services were affected by the economic crisis with a lag, which was reflected in a decrease in productivity in the majority of service industries in 2010. Productivity growth outpaced the EU average in 2010. Real productivity growth (3.4%) was slightly above the EU average (2.3%), but in the EU the drop in the previous year was smaller than in Slovenia. To a larger extent than in the EU, productivity gains in Slovenia were underpinned by lower employment (the drop in employment was 0.5% on average in the EU and 2.2% in Slovenia), while economic growth was weaker than in the EU. Expressed in purchasing power standards, Slovenia had achieved 84.6% of the average productivity in the EU in 2008 (77.0% of the euro-area average), but, as the economy contracted at a much faster pace, the gap to the EU widened by as much as 2.2 p.p. in 2009, according to the latest available data. Given that productivity growth outpaced the EU average last year, we estimate that the gap did not widen further. 1 Labour productivity is calculated as the ratio between GDP at constant prices and employment according to the methodology of the national accounts statistics. 2 Hourly productivity is calculated as the ratio between GDP at constant prices and the number of hours worked according to the methodology of the national accounts statistics.. 3 Active employment-policy measures, the Partial Subsidising of Full-time Work Act and Partial Reimbursement of Payment Compensation Act. Table: Labour productivity in PPS in Slovenia and the EU, 1997-2008, in %, EU-27=100 1997 2000 2005 2006 2007 2008 2009 EU-27 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Austria 119.9 120.6 115.0 115.9 113.9 114.2 113.2 Belgium 137.4 136.5 129.7 128.3 126.9 125.5 125.6 Bulgaria 26.3 31.1 35.6 36.2 37.3 39.3 40.0 Cyprus 80.7 84.9 82.8 83.7 85.3 88.5 89.1 Czech Rep. 60.5 61.8 68.5 69.3 71.4 72.1 72.9 Denmark 110.0 110.5 106.6 106.4 104.3 103.8 103.3 Estonia 39.9 46.9 60.5 62.1 65.4 64.4 65.5 Finland 110.5 114.8 110.5 110.0 113.0 112.5 109.1 France 125.7 125.0 122.1 121.1 121.3 120.0 121.0 Greece 93.2 93.6 98.3 98.0 96.5 99.3 98.1 Ireland 125.3 127.6 134.3 135.1 136.9 127.8 130.5 Italy 128.9 126.0 110.9 109.9 110.5 111.5 111.9 Latvia 35.5 40.1 47.9 48.8 51.4 51.5 53.2 Lithuania 38.5 42.7 54.4 56.2 59.0 61.3 57.3 Luxembourg 166.3 175.9 169.3 178.6 179.0 177.7 170.4 Hungary 56.9 57.8 67.4 67.8 68.0 71.4 72.3 Malta N/A 96.7 91.4 91.0 89.4 88.9 90.8 Germany 114.2 108.0 109.2 109.1 108.4 107.2 105.1 Netherlands 110.2 114.4 113.9 113.8 113.9 114.3 111.2 Poland 49.5 55.2 61.3 60.7 61.9 61.9 65.0 Portugal 70.3 71.5 72.2 72.5 73.4 72.9 75.4 Romania N/A 23.6 35.9 39.5 43.2 48.7 47.4 Slovakia 54.5 58.0 68.6 71.5 76.2 79.5 80.7 Slovenia 73.3 76.1 83.8 83.9 83.9 84.6 82.4 Spain 108.3 103.7 101.1 102.6 103.1 104.2 109.9 Sweden 113.6 114.3 111.4 112.5 114.3 112.8 109.9 U. K. 109.0 110.7 112.3 112.0 109.5 108.6 106.5 Source: Source: Eurostat Portal Page - Economy and Finance - National Accounts, 2010. Note: N/A - not available. Figure: Real annual productivity growth in EU Member States, 2009 and 2010, in % 10 8 6 4 2 0 -2 -4 -6 J? Source: Eurostat Portal Page - Economy and finance - National accounts, 2010. Note: For 2010, data for the Czech Republic, France, Greece and Luxembourg are Eurostat estimates. Market share After a long period of growth, Slovenia's market share of the world market in goods started to decrease during the crisis. In 2001-2007, when the EU recorded stagnation in its market share on the world market, Slovenia was ranked 10th in the group of the 15 Member States with growing market shares, behind most of the new Member States, which are its main competitors. In 2008-2009, when the market share of the EU shrank in the world market amid the slump in foreign demand, Slovenia was in the group of countries with above-average declines, meaning that Slovenia's relative position deteriorated markedly in comparison with previous years. The quarterly data for the first nine months of 20101 show that amid a revival in foreign demand, Slovenia's market share on the world market continued to shrink at an accelerated pace, as did the market share of the EU. Slovenia ranked in the middle of EU countries in terms of its decline in market share, which was at the EU average. In the time of crisis, Slovenia's market share has declined mainly as a result of the loss of market shares outside the EU. In 2009, Slovenia's market share increased in France and Germany, to a large extent due to the impact of additional subsidies to stimulate car purchases. Slovenia's aggregate market share in the EU therefore stopped falling in 2009, despite declining market shares in other trading partners from the EU, particularly Italy and Austria. Looking at non-EU countries, the economic crisis accelerated the decline in Slovenia's market shares in Croatia and Russia, as well as Serbia, where Slovenia's market share had been rising before the crisis. The quarterly data for the first nine months of 2010 show that the abolition of incentives for car purchases contributed to a new decline in Slovenia's market share in the German market and, consequently, in the EU (by 1%). Last year, Slovenia saw further growth in its market share in France; its market share in Austria also rose, after three years of decline. The decline in Slovenia's market shares outside the EU deepened in 2010 and Slovenia therefore also recorded a larger decline in its market share on the world goods market (-9%). Last year, Slovenia's market shares continued to fall in Croatia, Russia and Serbia. In Bosnia and Herzegovina, and Macedonia, its market shares declined, after two years of growth.2 Broken down into the sectors of the Standard International Trade Classification (SITC), the decline in Slovenia's global market share during the crisis was mainly impacted by medical and pharmaceutical products, metals, power generating, industrial and electrical machinery and furniture. Table 1: Slovenia's market share according to SITC SITC code Share in Slovenia's Share on world market, annual growth, in % exports in 2009, in % 2001-2007 2008-2009 0 to 9 Total 100.0 4.9 -2.8 0 to 4 Food and raw materials 10.7 5.9 8.4 5 to 8 Manufactured products 89.0 5.4 -3.1 5 Chemicals and related products, n.e.s. 16.2 5.8 0.7 54 Medicinal and pharmaceutical products 9.4 5.0 -2.3 6 Manufactured goods classified chiefly by material 20.8 2.9 -6.6 64 Paper, paperboard and articles thereof 3.0 1.5 1.4 67 Iron and steel 2.7 3.1 -13.5 69 Manufactures of metal 4.7 5.8 -7.9 7 Machinery and transport equipment 40.2 8.5 -0.2 71 Power generating machinery and equipment 2.5 4.4 -3.0 74 General industrial machinery 5.8 9.3 -6.3 77 Electrical machinery, apparatus and appliances 10.0 6.2 -0.9 78 Road vehicles 15.5 9.4 6.7 8 Miscellaneous manufactured articles 11.8 0.4 -8.6 82 Furniture and parts thereof 3.2 -1.0 -16.6 89 Miscellaneous manufactured articles, n.e.s. 3.6 7.4 -3.7 Source: United Nations Commodity Trade Statistics Database, 2010; calculations by IMAD. Note: SITC - Standard International Trade Classification. 1 According to preliminary WTO data. 2 The markets that have otherwise grown fastest during the crisis (China, India), as well as the South and Central America markets (Brasil) are relatively insignificant for Slovenia, given the structure of its foreign trade. Table2: Slovenia's market shares in the world market and in main trading partners, in % 1996 2003 2004 2005 2006 2007 2008 2009 Market share on world market 1 Slovenia 0.157 0.171 0.174 0.172 0.175 0.192 0.184 0.181 EU 40.925 41.082 40.354 38.228 37.556 37.852 36.481 36.381 Slovenia's market share in main trading partners2 Germany 0.555 0.490 0.477 0.457 0.449 0.473 0.459 0.470 Italy 0.530 0.561 0.582 0.589 0.612 0.687 0.630 0.630 Austria 0.819 1.021 1.066 1.203 1.356 1.328 1.311 1.281 France 0.218 0.199 0.236 0.311 0.268 0.287 0.275 0.351 United Kingdom 0.057 0.072 0.076 0.086 0.097 0.115 0.110 0.110 Poland 0.383 0.518 0.484 0.446 0.488 0.515 0.487 0.437 Hungary 0.655 0.529 0.513 0.536 0.630 0.940 0.838 0.828 Czech Republic 0.530 0.452 0.455 0.521 0.525 0.574 0.507 0.514 Croatia 10.979 8.029 8.723 8.731 8.471 8.267 8.156 8.066 Serbia np np np 3.013 4.824 4.925 4.574 4.585 Bosnia and Herzegovina np 11.059 10.182 9.032 8.002 7.518 7.591 8.275 Russian Federation 0.492 0.688 0.690 0.587 0.541 0.473 0.445 0.425 Source: United Nations Commodity Trade Statistics Database, 2010; calculations by IMAD. Note: 1 The market share of exports is calculated as a share of merchandise exports of Slovenia or the EU (intra and extra) in world merchandise exports. 2 Slovenia's market shares of the markets of its main trading partners are calculated as a share of Slovenia's merchandise exports in the merchandise imports of the trading partner. Figure: Market shares of EU Member States on the world market in 2001-2009, growth rates in % 15 10 cu 5 SS 5 g 0 C CD -5 £! s^ -10 "IB -15 ft I I 2001-2007 2008-2009 -a c JD J2 ^^ Ii Q J? C .12 — !S J^ it Source: United Nations Commodity Trade Statistics Database, 2010; calculations by IMAD. Unit labour costs The ratio of labour costs to GDP has deteriorated significantly during the crisis. After declining slightly in 2000-2007,1 real unit labour costs started to rise in 2008. In 2009, they recorded significant growth (5.1%, after 1.8% growth in 2008) arising from a substantial decline in labour productivity due to lower economic activity. Growth in compensation per employee slowed in 2009, after increasing strongly in the previous year due to wage adjustment for high past inflation and productivity, particularly in the private sector, and partly as a result of the beginning of the elimination of wage disparities in the public sector. During the crisis, the ratio of labour costs to value added in manufacturing deteriorated even more than in the overall economy. As the most export-oriented sector, manufacturing was hit hardest by the sharp fall in foreign demand during the crisis. Value added in manufacturing therefore recorded an above-average decline. The decline in employment in manufacturing was also larger than in other sectors of the economy,2 but failed to totally offset the negative effects of the larger drop in value added on labour productivity. Growth in real unit labour costs in manufacturing was therefore much stronger (3.3% in 2008; 9.3% in 2009) than in the economy as a whole (1.9% and 5.8%, respectively), despite weaker growth in compensation per employee. 2008-2009, Slovenia was ranked 9'h among EU Member States in terms of loss in cost competitiveness.5 According to the quarterly data, the ratio of labour costs per employee to GDP per person employed improved once again in 2010, but less than, on average, in the EU. In 2010, real unit labour costs fell once again under the impact of resumed labour productivity growth amid the rebound in economic growth and a further contraction of employment. However, due to the relatively strong wage growth in the private sector due to a higher minimum wage, their decline was much smaller than in the euro area and the EU.6 Labour productivity in 2010 was higher than in the EU, but due to a larger decline in employment rather than economic growth, which lagged behind the EU average. Manufacturing, which had suffered a greater loss in cost competitiveness than other sectors of the economy over the past two years, also recorded a greater improvement in 2010. The cost competitiveness of the economy in Slovenia has deteriorated much more during the crisis than the EU average. Real unit labour costs in the euro area and in the EU have also risen as a result of the crisis, but less notably than in Slovenia. The deterioration of Slovenia's competitive edge in 2008 resulted from higher growth in compensation per employee than in the EU, and in 2009, from a greater decline in labour productivity, since the fall in economic activity in Slovenia was one of the largest in the EU. Slovenia's position had already deteriorated slightly before the crisis, with cost competitiveness improving somewhat less than, on average, in the EU in 2000-2007.3 In terms of the labour costs to GDP ratio, Slovenia came closest to the euro-area average and the EU average in 1999, as in the second half of the 1990s, real unit labour costs in Slovenia declined much faster than in the EU.4 In 1 In 2000-2007, real unit labour costs dropped by 0.4% annually, on average; in the second half of the 1990s, by 2.6%. 2 Employment would have dropped even more in 2009, had the government not adopted two intervention acts during the economic crisis to preserve jobs (see the indicator Employment Rate). 3 The average annual drop of real unit labour costs in 2000-2007 in Slovenia was 0.4%; in the euro area 0.6%; in the EU 0.5%. 4 In 1999, a unit of GDP was produced by 0.621 of a unit of labour costs in Slovenia, 0.605 of a unit of labour costs in the EU, 0.589 of a unit of labour costs in the euro area; in 2007, by 0.603 of a unit of labour costs in Slovenia compared with 0.578 and 0.562 in the EU and euro area, respectively; in 2009, by an estimated 0.643 compared with 0.601 and 0.588, respectively. 5 In 2000-2007, the improvement in cost competitiveness was more pronounced than in Slovenia in 11 Member States, in 1995-1999, in only Ireland, with Slovenia sharing the second/ third place with Estonia. 6 20 out of the 23 EU countries for which the figures for 2010 are available recorded larger drops in real unit labour costs than Slovenia. Table: Unit labour costs in Slovenia and the EU Real annual growth rates, in % 1996-2005 2006 2007 2008 2009 2010 Unit labour costs1 Slovenia -1.1 -1.0 -1.6 1.8 5.1 -0.1 EU-27 -0.5 -1.1 -0.7 0.7 2.9 -1.3 EMU-16 -0.6 -0.9 -0.9 1.4 3.0 -1.2 Unit labour costs2 - Slovenia Total -1.4 -1.1 -1.6 1.9 5.8 -0.1 Manufacturing -2.1 -2.6 -2.2 3.3 9.3 -5.2 Source: SI-STAT data portal - Economy, 2010; Eurostat Portal Page - Economy and Finance, 2010. Notes: 1compensation of employees per employee in current prices divided by GDP per employee in current prices; 2compensation of employees per employee in current prices divided by value added per employee in current prices. Figure: Real growth of unit labour costs in Slovenia and EU Member States in 2009 and 2010 12 9 6 3 -6 -9 -12 Source: Eurostat Portal Page - Economy and Fina Note: *Data for 2010 are not yet available. 2010. Structure of merchandise exports by factor intensity With the contraction of production in low-tech industries, which were most affected by the crisis, the structure of merchandise exports by technological intensity1 of products improved significantly in 2008 and2009. After the remarkable one-off increase in 2003 (as a result of increased sales of pharmaceutical products in the US market that year), the share of high-tech products declined in 2004 and 2005. It started to increase modestly in 2006, but did not exceed the 2003 level before 2008. The share of high-tech products in Slovenia's merchandise exports increased further in 2009 (by 2.3 p.p.). The share of exports of pharmaceutical products, in particular, grew sharply. Despite the improvement in the last two years, the share of high-tech products was still well below the EU average in 2009 (by 6.6 p.p.), as well as below the average of the new EU Member States (by 1.8 p.p.). The share of medium-high-tech products in Slovenia's merchandise exports also increased in 2009 (by 0.6 p.p.), largely on account of a larger share of passenger-car exports (which were favourably impacted by measures stimulating car purchases in certain countries of the EU during the crisis), electrical machinery and household-type equipment. Slovenia's relative export advantage index for medium-high-tech products2 thus also increased and was the highest for this group of products3 in 2009. Medium-tech products accounted for 39.9% of Slovenia's merchandise exports, which is far above the EU average. of low-tech products also dropped more notably under the conditions of the economic crisis in 2009, particularly owing to a smaller share of exports of miscellaneous metal products. It is nonetheless higher than at the adoption of SDS (in 2005) and still exceeds the EU average. The share of exports of natural-resource-intensive products has fluctuated between 15% and 16% since 2005. After a slight decline in 2007, data for 2008 and 2009 reveal a new increase in the share of resource-intensive products in merchandise exports5 to the average level of 2005 and 2006. As the bulk of the increase is accounted for by locally renewable or reproducible natural resources such as wood and agricultural products, the high content of natural resources in exports is not problematic from the perspective of sustainability. These trends are, however, less favourable in view of their contribution to economic development, as these products generate relatively low value added per product. For a number of years, the total share of labour intensive and low-tech products in merchandise exports has contracted largely due to a further drop in the share of labour-intensive products.4 The share of labour-intensive products also continued to decline in 2009. After several years of sharp decline, the share of these products dropped by a mere 0.1 p.p. in Slovenia in 2009, remaining significantly larger than the EU average and also slightly above the average of the new Member States. After strengthening for several years, the share 1 The classification of products into individual groups is based on the UN methodology (Trade and Development Report, 2002). 2 Relative Export Advantage Index - RXA Balassa index or coefficient compares the share of Slovenia's exports of a certain group of products with the share of exports of this group of products in the exports of the group of countries that serves as a reference level (in this case, the EU-27). 3 The relative export advantage index for low-tech products was also at approximately the same level. 4 The groups of low-tech 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- and rolled-iron products, and base-metal products. 5 The main groups of exported resource-intensive products in Slovenia's merchandise exports are: aluminium, finished mineral manufactures, electricity, rough and worked wood, veneer and other manufactured wood, wood manufactures, and nonalcoholic and alcoholic beverages. Table: Structure of merchandise exports by factor intensity1 in Slovenia and in the EU, 2000-2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Resource-intensive EU-27 18.2 17.7 17.7 17.7 18.2 17.9 19.4 19.2 20.3 19.6 EU-15 18.0 17.5 17.7 17.6 18.2 17.8 19.4 19.3 20.5 19.6 EU-12 20.7 19.7 18.8 18.2 18.8 19.2 19.0 18.5 19.5 19.4 Slovenia 15.3 15.1 14.6 14.6 14.0 15.4 16.1 15.5 15.8 15.9 Labour-intensive EU-27 10.6 10.7 10.7 10.4 9.8 9.0 8.6 8.5 8.2 8.7 EU-15 10.1 10.1 10.1 9.8 9.3 8.6 8.2 8.1 7.9 8.4 EU-12 18.5 18.9 18.8 17.7 15.8 14.0 12.3 11.4 10.2 10.8 Slovenia 21.6 21.3 20.0 18.7 17.8 17.0 14.2 12.6 11.7 11.6 Low-tech EU-27 6.9 7.0 7.0 7.2 7.7 7.0 7.4 7.9 8.2 7.0 EU-15 6.6 6.7 6.7 6.9 7.4 6.6 7.1 7.6 7.8 6.7 EU-12 10.5 10.9 11.0 11.0 11.5 10.6 10.8 11.1 11.0 9.1 Slovenia 9.9 9.9 9.9 10.1 10.8 8.8 10.2 10.4 11.1 9.8 Medium-tech EU-27 29.8 30.4 30.5 30.9 31.0 30.1 29.9 30.8 30.0 28.4 EU-15 29.8 30.3 30.5 30.7 30.8 29.8 29.5 30.2 29.5 27.8 EU-12 30.1 30.6 31.5 33.1 33.3 33.3 34.3 35.5 34.1 33.7 Slovenia 36.2 36.2 37.3 37.3 38.3 40.2 39.1 40.9 39.3 39.9 High-tech EU-27 28.7 28.7 28.7 27.6 27.1 27.7 27.7 25.8 25.2 27.7 EU-15 29.4 29.4 29.5 28.3 27.9 28.5 28.6 26.5 25.8 28.3 EU-12 18.1 17.3 17.9 18.0 18.8 18.2 19.2 19.7 20.6 22.9 Slovenia 15.5 16.0 16.7 17.9 17.2 16.0 17.1 17.4 18.8 21.1 Source: Handbook of Statistics 2007-2008 (United Nations), 2007; United Nations Commodity Trade Statistics Database, 2009; calculations by IMAD. Note: 'The classification of products into individual groups is based on the UN methodology (Trade and Development Report, 2002). The classification does not include all products and therefore the sum of the five product groups does not necessarily equal 100. Figure: Relative export advantage index1 of Slovenia's exports by factor intensity High-tech products Resource-intensive 2.1. Medium-tech products ' ---------2000 --- 2005 -2009 Labour-intensive Low-tech products Source: Handbook of Statistics 2007-08 (United Nations); United Nations Statistics Division: Comtrade; calculations by IMAD. Note: 'Relative Export Advantage Index - RXA Balassa index or coefficient compares the share of Slovenia's exports of a certain group of products with the share of exports of this group of products in the exports of the group of countries that serves as a reference level (in this case, the EU-27). Exports and imports as a share of GDP After declining significantly in the first year of the crisis (2009), the openness of Slovenia's economy to foreign trade increased somewhat in 2009, largely as a result of the recovery of foreign demand, while domestic demand shrank once again. The rapid increase in the openness of Slovenia's economy recorded during the economic upturn slowed substantially in 2009. In 2010, the level of Slovenia's trade integration increased somewhat again, but was lower than in 2006-2008. The average share of trade in goods and services in GDP thus reached 63.1% in 2010, a 5.7 p.p. higher figure than a year previously, with the increase solely a result of higher trade in goods. The share of merchandise exports expanded by 5.2 p.p., the share of merchandise imports by 5.9 p.p. The growth of merchandise exports in Slovenia was slower than in most other EU countries. The growth of merchandise imports was, given the strengthening of production volume in manufacturing, largely affected by higher imports of intermediate goods, with imports of consumer goods recording modest growth due to weak household consumption. Imports of investment goods dropped amid a further contraction of domestic investment activity. The value of total merchandise imports was also impacted by higher energy and commodity prices. Foreign trade in services as a share of GDP remained at the 2009 level. The share of transport services in services exports strengthened somewhat, while exports of travel services declined. The share of predominantly knowledge-intensive services (the group of other services), including insurance, financial, computer and IT services, communication services, licences, patents and copyrights, and other business services, stagnated for the third consecutive year. The share of the group of other services in Slovenia's exports (33.6%) thus remains way below the EU average (58.1% in 2009). foreign trade as a share of GDP increased on average from 48.2% in 2000 to 56.1% in 2007. In 2008 and 2009, most of the small open economies were affected by the slump in world trade, though less than Slovenia. The average increase in the openness to foreign trade in small countries in 2010 was smaller (by 3.2 p.p.) than in Slovenia (by 5.7 p.p.). Trade integration increased somewhat more in Slovenia than the average for the EU, but less than in the majority of the small economies of the EU. The level of trade integration in the EU increased in the period of favourable economic conditions (2003-2008). In 2009, it declined, before rising again in 2010. In both years, the changes were less pronounced than in Slovenia. The gap in openness to foreign trade between Slovenia and the EU average, which widened in 2000-2007, has thus been narrowing since 2007 (from 30.6 p.p. to 23.3 p.p. in 2010), largely due to a significant decline in the share of trade in GDP in Slovenia at the beginning of the crisis. In 20002007, Slovenia's openness to foreign trade increased much more than that in other small EU Member States. In the twelve EU countries that are classified among small countries according to demographic criteria,1 1 A demographic criterion, the absolute number of population, was used as a measure of an individual country's size. Altogether, 12 Member States with less than 10 million inhabitants qualify as small according to this criterion: Austria, Cyprus, Denmark, Estonia, Finland, Ireland, Latvia, Luxembourg, Malta, Slovakia and Slovenia. Table: Average trade-to-GDP ratio (exports and imports)1 in Slovenia and the EU, in % 1995 2000 2005 2006 2007 2008 2009 2010 Trade-to-GDP ratio - Slovenia 50.9 55.7 62.3 66.8 70.4 68.9 57.5 63.1 Goods 42.4 47.3 52.6 56.7 59.8 57.3 46.8 52.3 Services 8.6 8.5 9.7 10.1 10.7 11.6 10.8 10.8 Exports of goods and services 49.9 53.9 62.1 66.5 69.5 67.4 58.1 63.4 Goods 40.0 44.4 50.8 54.8 57.3 53.7 45.7 50.9 Services 9.9 9.6 11.3 11.7 12.3 13.6 12.4 12.5 Imports of goods and services 51.8 57.4 62.5 67.0 71.3 70.4 56.8 62.9 Goods 44.7 50.2 54.4 58.6 62.2 60.9 47.8 53.7 Services 7.2 7.3 8.1 8.4 9.1 9.5 9.1 9.2 Trade-to-GDP ratio - EU-27 28.9 35.8 36.8 39.4 39.9 41.1 36.1 39.8 Goods 22.9 28.0 28.5 30.6 30.8 31.7 27.0 30.5 Services 6.0 7.9 8.4 8.8 9.1 9.4 9.1 9.3 Sources: SI-STAT data portal - National accounts, 2011; Eurostat Portal Page - Economy and finance, 2011; calculations by IMAD. Note: 'The ratio between the average value of total exports and imports according to the national accounts statistics and GDP in current p Figure: Average trade-to-GDP ratio (exports and imports) in Slovenia and selected small EU Member States, in %, 2008-2010 r.2000 180 160 140 120 100 80 60 40 20 0 Sources: SI-STAT data portal - National accounts, 2011; Eurostat Portal Page - Economy and finance, 2011; calculations by IMAD. 12008 «2009 Foreign direct investment In 2009, the economic crisis had a strong negative impact on inward and outward FDI in Slovenia. Inward FDI stock dropped by 6.6% and outward FDI stock by 3.4%. The decrease is also corroborated by data on FDI flows. Inflows were negative in 2009 whereas outflows dropped to 12.7% of the sum recorded in the year before - the first time in Slovenia's history that FDI inflows were negative. Slovenia thus recorded a net outflow of FDI in 2009. Breaking down FDI stock to changes in equity capital and reinvested profit, and changes in net claims (liabilities arising from crediting between affiliates), it becomes clear that practically the entire decrease in FDI stock in 2009 was due to a contraction of crediting between affiliates, whereas the stock of equity capital remained practically unchanged. Net liabilities of Slovenian subsidiaries to parent companies abroad thus dropped by EUR 701.9 m (95.4% of the total decrease), while net claims of Slovenian investors on their foreign subsidiaries were down EUR 181.7 m (94.6% of the total decrease). with a drop of EUR 552.3 m the year before), signals a return of confidence of foreign parent companies in their Slovenian subsidiaries. This is also clear from the results of surveys among Slovenia-based foreign subsidiaries in 2009 and 2010. In 2009, as many as 67.7% of respondents forecast a drop in sales for the current year while in 2010, 59.2% did. Improved expectations for the following year are even more obvious. In 2009, 60.8% forecast an improvement in sales for the following year and as many as 78.9% did in 2010. As for the number of employees, 42.3% forecast an increase in 2009 and 67.4% in 2010 (IER-JAPTI, 2009, 2010). Despite the steep decline in FDI stock in 2009, its share relative to GDP dropped only marginally amid the strong contraction of economic activity, but nevertheless remained substantially lower than in the majority of EU countries. Inward FDI stock rose from 20.2% of GDP to 30.1% of GDP in the 2005-2008 period, dropping to 29.7% of GDP in 2009. Outward FDI stock meanwhile rose from 9.2% to 15.2% of GDP in 20052008 and to 15.5% of GDP in 2009, with the dynamics in Slovenia different from those in other EU countries. In the vast majority of EU countries, inward FDI stock dropped in 2008 as a result of the recession and rebounded in 2009. In Slovenia, the contraction was delayed until 2009, when the majority of other EU countries were already recording a rebound in FDI stock. Slovenia thus remains among the EU countries with the lowest inward FDI stock as a share of GDP. In terms of outward FDI stock as a share of GDP, it lags behind Cyprus, Estonia, Malta and Hungary among the new Member States. FDI flows and changes in FDI stock in 2010 indicate a gradual recovery and renewed increase in FDI. In 2010, FDI inflows to Slovenia amounted to EUR 629.8 m. Outflows meanwhile dropped once more. Slovenia thus recorded net FDI inflows of EUR 515.9m in 2010. The structure of inflows was as follows: increase in equity capital accounted for 3.0% of the total, reinvested profit accounted for 30.5% and increase in net liabilities of Slovenian subsidiaries to parent companies abroad (intra-company financing) 66.5%. The fact that EUR 138.2 m of profit of foreign investors in Slovenia was reinvested in 2010 as compared to only EUR 37.7 m in 2009, and that intra-company crediting of Slovenian subsidiaries started to increase again (by EUR 109.4 m in 2010 compared Table: Flows and stock of inward and outward FDI1 in Slovenia in 2000-20102 in EUR m 2000 2005 2006 2007 2008 2009 2010 INWARD FDI Year-end stock 3,109.8 6,133.6 6,822.3 9,765.1 11,236.3 10,500.2 N/A Annual inflow 149.1 472.5 513.3 1,106.4 1,329.5 -418.6 629.8 Stock as a % of GDP 14.8 21.7 22.0 28.2 30.1 29.7 N/A OUTWARD FDI Year-end stock 825.3 2,788.7 3,452.2 4,916.6 5,677.0 5,484.9 N/A Annual outflow3 -71.7 -515.6 -687.0 -1,316.6 -948.7 -120.5 -113.9 Stock as a % of GDP 3.9 9.9 11.1 14.2 15.2 15.5 N/A Source: Bank of Slovenia, 2011 - www.bsi.si, SI-STAT Data Portal - National Accounts, 2009, 2008. Notes: 1 Companies in which a foreign investor has a 10% or higher share. 2 Since 1996, the figure has also included direct investment of companies in second affiliation. Since 2007, equity-related claims and liabilities cover all claims and liabilities a company has with the direct foreign owner as well as with all non-resident companies that are part of the foreign owner's group of companies (see International economic relations - Bank of Slovenia, March 2007, p. 11-13). 3 Negative value denotes outflow; N/A - not available. Figure 1: Inward FDI stock relative to GDP in the EU in 2005 and 2009 200 180 160 140 120 100 80 60 40 20 0 JB £ £ IS c -C £ o -o cu ■Ü cu u £ ä c c m ^ c D cu CU C (Z 3 -SI 'n SE U X CÜ '.IJ cc Source: Statistical Insurance Bulletin 2010 (Slovenian Insurance Association), 2010; CEA: European Insurance in Figures, 2010; National accounts (SORS), 2011; Eurostat, 2011. 8 4 0 Market capitalisation of shares After a modest increase in 2009, the value of market capitalisation of shares relative to GDP declined again in 2010, falling below20%. It reached the lowest value since 2001, just one third of the highest level in 2007. The main reason for the decline is a further drop in market capitalisation on the Ljubljana Stock Exchange, which has declined since 2008 largely due to lower values of securities1 and, to a smaller extent, withdrawal of certain shares from the listing on the Stock Exchange. The value of GDP also rose somewhat in 2010, which added to the decline in the indicator's value. Market capitalisation of shares contracted by 16.9% (the least, by just over one tenth, market capitalisation of the most liquid shares listed in the prime market and representing two thirds of total market capitalisation of shares on the Ljubljana Stock Exchange). The volumes of market capitalisation of shares in the standard and entry markets dropped much more, by one third and one fifth, respectively. The volume of trading of shares fell even more, hitting a ten-year low, EUR 360.8 m, less than half of the figure a year previously. Slovenia's capital market is a relatively insignificant source of financing Slovenia's economy Enterprises seldom acquire financial sources by issuing securities. They are often too small for this type of financing; with low capital market transparency and liquidity, investors are also not particularly interested in purchasing securities on the Ljubljana Stock Exchange, which is ranked among the least liquid stock exchanges in the EU. The marketability of shares listed on the Ljubljana Stock Exchange, measured as the ratio of turnover to market capitalisation, nearly halved in 2010 to 0.05; if this ratio remained unchanged, the turnover of total market capitalisation would take 20 years compared with less than 1 year on the most developed capital markets. Stock Exchange (FTSE100) recorded less than 10% growth last year, while the value of the British Pound Sterling appreciated by only slightly more than 3% in 2010 against the euro. Slovenia is ranked among the countries with lowest values for market capitalisation relative to GDP and the development gap increased further in 2010. The market capitalisation of shares relative to GDP thus reached less than 30% of the EU average, which was at the level of 70% of GDP, and increased for the second successive year. A further widening of the gap reflected the growth in market capitalisation in the EU, which otherwise strengthened by 17.1% in 2010 but nevertheless amounted to only just over half of 2009 growth. Growth was significantly underpinned by movements in the United Kingdom, which accounted for nearly one third of market capitalisation of shares in the EU. Market capitalisation of shares thus strengthened by nearly 40%, in our assessment also as a result of new issues of securities, as the main index of the London 1 The SBI TOP index recorded a 13.5% decline in 2010. Table: Selected capital market indicators for Slovenia, 1995-2010 1995 2000 2005 2006 2007 2008 2009 2010 Market capitalisation of shares, excl. investment funds, EUR1 mR1 250.7 3,333.7 6,696.6 11,513.1 19,740.1 8,468.4 8,462.2 7,027.9 Market capitalisation of shares, excl. investment funds, % of GDP 1.6 15.6 23.3 37.1 57.1 22.7 24.3 19.5 SBI20 941.02 1473.33 2518.92 854.26 982.67 850.35 Number of securities 49 267 227 202 185 187 174 159 Shares 27 197 128 109 96 96 89 80 Of which investment funds 0 44 10 7 10 11 11 6 Bonds 22 68 99 93 89 90 85 79 Source: Annual Statistical Report (Ljubljana Stock Exchange), 2011; National Notes: SBI - Slovenian Stock Exchange Index, 1 IMAD's conversion into euros accounts (SORS), 2011; calculations by IMAD. taking into account the exchange rate on the last day of the current year. Figure: Market capitalisation in selected EU Member States in 2010, as % of GDP 100 80 60 Q 13 40 20 Source: Annual Statistical Report (Ljubljana Stock Exchange), 2011; First Release - national accounts (SORS), 2011; Stock-market capitalisation (Eurostat), 2011; calculations by IMAD. Note: Since January 2001, Euronext incorporates Paris, Amsterdam, and Brussels Stock Exchanges, joined by the Lisbon Stock Exchange in February 2002. OMX incorporates Scandinavian (Denmark, Finland, Sweden), Baltic (Estonia, Latvia, Lithuania) and Iceland Stock Exchanges. 0 THE SECOND PRIORITY: Efficient use of knowledge for economic development and high-quality jobs Share of population with a tertiary education Average years of schooling of adult population Ratio of students to teaching staff Public expenditure on education Private expenditure on education Expenditure on educational institutions per student Adult participation in education Gross domestic expenditure on research and development Science and technology graduates Innovation-active enterprises Intellectual property Internet use and access Share of population with a tertiary education In 2010, the share of population with a tertiary education increased; however, the gap behind the EU average has not narrowed substantially in the period of SDS implementation. According to the Labour Force Survey (LFS) for the second quarter of 2010, the share of the population with a tertiary education aged 2564 was 23.7%, which is 2.0 p.p. below the EU average. On this indicator, Slovenia lags significantly behind the economically more advanced northern European countries, in particular. In 2010, this share rose slightly more in Slovenia than the EU average (Slovenia: 1.3 p.p.; EU: 0.8 p.p.). Although in Slovenia this share also rose slightly faster in the period of SDS implementation (2005-2010), the gap behind the leading countries did not narrow significantly. In Slovenia, enrolment in tertiary education per 1,000 population aged 20-29 is significantly above the EU average, yet it lags behind in the number of graduates per 1,000 population of the same age. This is due to the low efficiency of studies in Slovenia and to young people taking part in education to access the benefits of student status. The increase in the share of the population with a tertiary education in the age group 25-64 was the result of the growing number of students enrolled in a tertiary education over the period 2000/2001-2009/2010 (by 25.6%), and consequently, of a higher number of graduates (by 57.5% in the 2000-2009 period). In 2008 (the latest international data available), the ratio of the number of those enrolled in tertiary education to the number of the population aged 20-29 was one of the highest in the EU (40.7), significantly exceeding the EU average (28.9). Yet by number of graduates per 1,000 population aged 20-29 (60.7), Slovenia lagged behind the EU average (63.5) in 2008, which suggests low efficiency of studies. (2009/2010: 57.8%, men: 42.2%) and the higher share of women in the total number of graduates (2009: 61.8%, men: 38.2%). In the 2000-2009 period, both female shares further increased. The gap in the share of tertiary-education graduates between the young and the elderly population is considerable, and a notable increase was also recorded in the 2000-2010 period. In the 30-34 age group, the share of tertiary-education graduates was 34.0% in 2010, exceeding the EU average by 0.6 p.p. Compared to 2009, the share increased by 2.6 p.p., with growth higher than the EU average (1.4 p.p.). However, taking into account young people aged 25-29, and thus expanding the age group to 25-34 years, the trend in the share of tertiary-education graduates is less favourable. At 31.4%, it lagged behind the EU average (32.9%) in 2010, and the gap, given the high participation rate of young people in tertiary education, is mainly due to the long average duration of studies. The share of population with tertiary education differs substantially with regard to age. The share of the elderly population with tertiary education is considerably lower than the share of young people (2010: aged 35-44: 26.7%; aged 45-54: 19.7%; aged 55-64: 16.3%). The large gap between young people and elderly people in tertiary-education graduate rates can mainly be attributed to considerable differences in participation in tertiary education. The participation of young people aged 20-29 in tertiary education strongly exceeds the participation of other age groups (30-39, 40-64), and also recorded significantly higher growth in the 2000/2001-2009/2010 period. As a consequence, the gap in the share of tertiary-education graduates between the youngest (25-34 years) and the older age groups also widened in 2000-2010. In terms of share of population with a tertiary education, Slovenia lagged behind the EU average in 2010 in all age groups (25-34 years, 35-44 years, 45-54 years and 55-64 years), with the gap widest in the 45-54 age group, and narrowest in the 35-44 age group. In 2000-2010, the increase in the share of population with a tertiary education exceeded the average increase in the EU in all the analysed categories, except in the oldest age group (55-64 years). The share of female tertiary-education graduates considerably exceeds the corresponding male share, and the gap between the two widened notably in the 2000-2010 period. In 2010, the share of women with tertiary education was 28.8%, and the corresponding share of men was 18.9%. However, Slovenia exceeded the EU average only in terms of the share of female tertiary-education graduates. The increase in the female share was also more notable than that of the male share. In 2010, the gap between the share of female and male tertiary graduates was 9.9 p.p., thus reaching the highest level in the 2000-2010 period. The average gap in the EU was 1.5 p.p. The higher share of female tertiary-education graduates can be associated with the higher share of women enrolled in tertiary education Table: Share of population aged 25-64 with tertiary education, EU, 1995-2010 (second quarter), in % 1995 2000 2005 2006 2007 2008 2009 EU-27 9.4 18.5 22.2 22.8 23.4 24.1 25.0 25.7 Austria N/A 14.5 17.6 17.7 17.7 18.1 19.1 19.5 Belgium 25.3 27.1 30.7 31.0 31.4 31.9 32.4 35.2 Bulgaria N/A 18.4 21.4 21.7 22.1 22.8 22.9 22.8 Cyprus N/A 25.1 27.8 29.9 33.0 34.6 34.3 35.1 Czech Rep. 10.5 11.5 13.1 13.5 13.7 14.3 15.4 16.7 Denmark 25.4 25.2 32.9 34.8 30.5 34.3 32.7 33.1 Estonia 30.2 28.9 33.6 32.9 34.0 33.5 35.9 35.7 Finland 28.8 32.3 34.5 34.9 36.4 36.5 37.1 37.1 France N/A N/A 25.0 25.9 26.8 27.1 28.6 28.9 Greece 16.8 16.9 20.5 21.3 21.9 22.5 22.7 23.7 Ireland 0.0 21.2 28.3 30.1 31.2 32.7 34.2 36.1 Italy 8.6 9.4 11.9 12.7 13.5 14.3 14.4 14.7 Latvia 17.0 18.0 21.5 21.4 23.6 24.2 23.7 26.9 Lithuania 41.0 41.8 26.5 27.2 29.8 30.5 30.2 32.3 Luxembourg N/A 17.9 26.5 24.0 28.6 28.3 34.0 34.5 Hungary 13.1 14.0 17.0 17.8 17.9 19.1 19.8 20.0 Malta N/A 5.4 12.1 12.4 12.4 13.3 12.8 12.9 Germany N/A 22.5 24.5 24.2 24.3 25.1 26.3 26.4 Netherland 21.8 24.0 29.9 29.8 30.3 32.0 32.3 33.8 Poland 10.7 11.4 16.5 17.8 18.8 19.6 21.2 22.6 Portugal 8.3 9.0 12.7 13.4 13.6 14.2 14.7 15.5 Romania 8.7 9.2 11.0 11.8 12.0 12.9 13.2 13.4 Slovakia 10.3 10.2 13.9 14.4 14.4 14.6 15.6 17.1 Slovenia 14.4 15.7 20.0 21.5 22.9 21.9 22.5 23.7 Spain 20.0 22.5 28.2 28.4 28.9 29.3 29.5 30.5 Sweden 27.4 29.5 29.3 30.3 31.2 31.9 32.8 34.0 U.K. N/A 24.4 28.3 29.3 30.4 31.6 32.9 34.5 Source of data: Eurostat Portal Page - Population and Social Conditions, 2011. Note: N/A - not available. Figure: Share of population with tertiary education, Slovenia, by age, 2000, 2009 and 2010, (second quarter), in % 35 30 25 20 15 10 5 25-34 years 35-44 years 45-54 years 55-64 years 0 Average years of schooling of adult population In 2009, the average number of years of schooling of the adult population increased further. According to the Labour Force Survey, the population aged 25-64 completed an average of 11.6 years of schooling1 in 2009 (0.1 year more than the figure for the previous year, and 0.7 year more than in 2000, respectively). The average number of years of schooling continues to show an increasing trend, mainly due to a growing share of recent educational cohorts completing tertiary education. Among these, the share of women continues to increase, and consequently, the average education level of women in 2003 was already higher than that in men. Due to increasing participation of young generations in tertiary education over the past ten years, the average number of years of schooling of Slovenia's population in older age groups lags behind that of younger age groups. On average, the education level achieved by the population aged 25-39 is an entire schooling year higher than that for the age group 40-64, which in turn exceeds by almost one schooling year and a half the education level of the group older than 65 years. By a rough estimate based on the available data by Eurostat, the average number of years of schooling of the population aged 25-64 is slightly higher in Slovenia than in EU countries, which is mainly due to a high share of population with secondary education, whereas in terms of share of tertiary-education graduates, Slovenia is only slowly catching up with the most advanced economies.2 before, and 0.7 year more than in 2000, respectively). According to the Statistical Register of Employment, which does not include farmers and persons in informal employment but does include temporarily employed foreigners who mainly have low educational attainment (not covered by the Labour Force Survey), the average number of years of schooling of the population in employment is slightly lower. In September 2009, it was 11.8, and a year later 11.9. In 2009-2010, the economic crisis was hardest on sectors employing a less-educated workforce (construction, labour-intensive manufacturing), which is why the number of employed people with lower- and upper-secondary vocational education declined in particular in these two years. The number of employed people with general secondary education also dropped in 2010, while the number of employed people with post-secondary and higher education increased in both years, particularly in business and public services, and in wholesale and retail trade, while the increase in the number of employees with higher education in manufacturing was relatively modest. The average number of years of schooling of the population in employment is also rising, mainly due to a reduced number of employees with lower levels of education.3 According to the Labour Force Survey, the workforce in Slovenia had completed an average of 12.2 years of schooling in 2009 (0.1 year more than the year 1 Calculations made by IMAD, taking into account the following assumptions on the average regulatory length of schooling: 6 years without completed primary school, 8 years with completed primary school, 9.5 years with lower vocational education, 11 years with upper-secondary vocational education, 12.2 years with completed vocational or general secondary school, 14 years with post-secondary education, 16.2 years with university education, and 19 years with postgraduate education. 2 Source of data: Eurostat Portal Page - Population and social conditions - Education and Training - Educational attainment. According to our rough estimate based on the assumption that, in all the countries covered, 8 years of schooling are needed to achieve lower-secondary education level, 11.7 years for higher-secondary education, and 16 years for tertiary education, the average level of education in Slovenia exceeds the EU average by 0.3 years of schooling. See the indicator Share of the population with tertiary education. 3 See the indicator Employment rate. Table: Average number of years in formal education attained by persons in employment in Slovenia in 1995-2010, by activity 1995 2000 2005 2006 2007 2008 2009 20101 Employment according to LFS 11.1 11.5 11.9 12.0 12.0 12.1 12.2 Persons in employment excluding farmers, according to SORS register, 10.8 11.1 11.4 11.5 11.5 11.5 11.8 11.9 BUSINESS SECTOR 10.4 10.6 10.9 10.9 11.0 11.0 11.3 11.4 Agriculture, hunting, forestry, fisheries 10.0 10.4 10.3 10.2 10.3 10.3 10.4 10.5 Industry 9.9 10.1 10.4 10.4 10.5 10.6 10.8 10.9 Construction 9.9 9.6 9.6 9.6 9.5 9.4 9.9 10.0 Wholesale & retail trade, hotels & restaurants, transport 10.8 11.0 11.2 11.3 11.3 11.3 11.5 11.5 Financial and business services 12.1 12.3 12.5 12.6 12.6 12.6 12.9 13.0 PREDOMINANTLY NON-MARKET-ORIENTED SERVICES 12.4 12.6 13.2 13.2 13.3 13.4 13.5 13.6 Health and social work 11.8 11.7 12.6 12.7 12.7 12.8 12.9 13.0 Public administration, education 12.9 13.3 13.7 13.8 13.9 14.0 14.0 14.1 Other mainly non-market-oriented services 11.7 11.8 12.2 12.2 12.2 12.3 12.5 12.6 Source of data: Labour market - Labour Force Survey and Persons in Employment (farmers excluded) by level of education, activity and sex on 30 September (for year 1995) and on 31 December (for 2000). SORS; calculations by IMAD. Note: 1 Given the improved methodology for collecting and monitoring data on the highest attained level of education and the changed classification of activities, calculations for the years 2009 and 2010 are not comparable with data for previous years. Figure: Average number of years of schooling of the adult population by age, Slovenia 13 12 JS £ 10 Population aged 25-39 • Population aged 40-64 Population aged 65 and over Population aged 25-64, total Source of data: Labour market - Labour Force Survey, SORS; calculations by IMAD. 9 8 Ratio of students to teaching staff The ratio of students1 to teaching staff2 in Slovenia is improving, but the gap behind other European countries is still considerable. On the international level, this ratio is an important indicator of the quality of tertiary education. A lower ratio (i.e. lower number of students per teacher) presumably facilitates the use of active teaching techniques as well as enhancing communication between students and teachers. This has a positive impact on the quality of the teaching process, which, in turn, influences the quality of the acquired knowledge and skills, the progress achieved by the students, as well as the efficiency of studies. In terms of this ratio, in year 2008 (2007/2008 academic year), for which the latest data are available at the international level, Slovenia lagged significantly (with 20.5 students per teacher) behind the OECD average (15.8) and behind the average of the EU-19 countries that are also OECD members. According to this indicator, Slovenia also lagged behind all other EU countries in the 2007/2008 academic year.3 The unfavourable ratio of students to teaching staff is also due to participation in tertiary education merely because of the benefits of student status. Compared with 2007, the ratio of students to teaching staff improved in Slovenia, while it diminished on the OECD average, which contributed to the narrowing of Slovenia's gap behind this average. The gap behind the EU-19 average, on the other hand, widened slightly in 2008. As in 2008, the ratio of students to teaching staff in the 2000-2008 period improved, which is contrary to the dynamics within the OECD average where it deteriorated. The trend of improving students to teaching staff ratio continued into the 2008/2009 and 2009/2010 academic years when the growth in the number of teachers exceeded the growth in the number of students enrolled in tertiary education. In the period of SDS implementation, this ratio recorded a slight improvement in Slovenia, but the gap behind the leading countries remains substantial. 1 All students participating in tertiary education are covered in the equivalent of full-time study = full-time students + 1/3 (i.e. part-time students + candidates for graduation + postgraduate students) (SORS, Teaching staff at higher-education institutions and vocational colleges, Slovenia, 2006). 2 Tertiary education includes full-time and part-time post-secondary vocational studies, higher undergraduate studies and postgraduate studies. 3 Data for 2008 not available for Greece. Table: Ratio of students to teaching staff in tertiary education, Slovenia and OECD countries, 1998-2008 1998 2000 2005 2006 2007 2008 OECD 14.8 14.7 15.8 15.3 15.3 15.8 EU-19 N/A N/A 16.4 16.0 16.0 15.4 Austria N/A N/A 15.3 13.0 13.7 14.6 Belgium N/A 19.9 19.6 18.7 18.1 19.0 Czech Rep. 13.5 13.5 19.0 18.5 18.6 19.1 Čile N/A N/A N/A N/A N/A 30.0 Finland N/A N/A 12.5 15.8 16.6 15.8 France N/A 18.3 17.3 17.0 16.6 16.2 Greece 26.3 26.8 30.2 27.8 26.3 N/A Ireland 16.6 17.4 17.4 17.9 16.5 15.9 Italy N/A 22.8 21.4 20.4 19.5 19.5 Israel N/A N/A N/A N/A 12.9 N/A Hungary 11.8 13.1 15.9 16.5 17.1 17.1 Germany 12.4 12.1 12.2 12.4 12.1 11.5 Poland N/A 14.7 18.2 17.3 17.2 16.7 Portugal N/A N/A 13.2 12.7 13.2 13.8 Slovakia N/A 10.2 11.7 12.4 13.2 15.4 Slovenia N/A 23.8 22.7 21.4 21.0 20.5 Spain 17.2 15.9 10.6 10.8 10.4 11.1 Sweden 9.0 9.3 8.9 9.0 8.8 8.5 U.K. 17.7 17.6 18.2 16.4 17.6 16.9 Iceland 9.3 7.9 11.0 10.7 10.2 10.1 Japan 11.8 11.4 11.0 10.8 10.6 10.4 Norway 13.0 12.7 N/A 10.5 10.0 9.3 USA 14.6 13.5 15.7 N/A 15.1 15.0 Source of data: Education at a Glance, (OECD), issues 2002-2010; Teaching staff at higher education institutions and vocational colleges, Slovenia, (SORS, first release), 2008; Teaching staff at higher education institutions and vocational colleges, Slovenia, (SORS, first release), 2007; Teaching staff at higher education institutions and vocational colleges, Slovenia, (SORS, first release), 2006; Teaching staff at higher education institutions and vocational colleges, Slovenia, (SORS, first release), 2006; Rapid Report No.5; Teaching and professional staff at higher education institutions and vocational colleges, (SORS), 2001; Rapid Report No.37 - Student enrolment in tertiary education (SORS), 2007; SI-STAT-Demography and social statistics - Education, 2011. Notes: 1 Data are only available for the EU countries that are members of OECD; N/A - no data available. Figure: Ratio of students to teaching staff in tertiary education, Slovenia and OECD countries, 2008 (2007/2008 academic year) 35 30 25 20 15 10 5 0 Source of data: Education at a Glance (2010); Teaching staff at higher education institutions and vocational colleges (First release), 2008; SORS; SI-STATT data portal - Demography and social statistics - Education, 2010, calculations by IMAD. Public expenditure on education Total public expenditure on education1 as a share of GDP2 exceeds the EU average. In 2008, it accounted for 5.19% of GDP, a level approximately identical to that in 2007. In 2000-2007 (the latest international data available), public expenditure on education in Slovenia exceeded the EU average, which is related to the high level of participation of young people in education, which is one of the highest in the EU. With regard to level of education, public expenditure as a share of GDP in 2008 increased only at the lower levels of education. The highest increase was recorded at the level of pre-school education where this share was 0.49% in 2008. Public expenditure as a share of GDP also rose at the level of primary education (to 2.35% of GDP). At the level of upper-secondary education, public expenditure accounted for 1.15% of GDP, a slight drop over the level in 2007. At the tertiary level, it accounted for 1.21% of GDP, remaining at the previous year's level. In 2001-2007, public expenditure on tertiary education as a share of GDP exceeded the EU average (2007: 1.12%), given that participation in tertiary education in Slovenia is also significantly higher than in the EU. In 2000-2008, public expenditure on education as a share of GDP diminished at all education levels, with the exception of pre-school education where it increased slightly, but was lower in 2007 than on average in the EU. For this level of education, in 2001-2007, public expenditure as a share of GDP increased in more than half of EU countries, which is due to policies aiming to increase participation of children in organised pre-school programmes. A higher number of births in recent years will put additional pressure on pre-school programmes in Slovenia, and consequently, on public expenditure for this level of education. The decline in public expenditure as a share of GDP for upper-secondary and primary education levels in 2000-2008 is also a result of a reduced number of students enrolled due to changed demographics (population ageing and consequently, shrinking generations for enrolment in education programmes). However, given the rise in the number of children born in recent years, the size of the generation for enrolment in primary education will start to grow, which will also have an impact on the volume of public expenditure on primary education. At the level of tertiary education, public expenditure on education as a share of GDP diminished in 2000-2008 despite the sharp increase in the number of enrolled students. In 2001-2007, Slovenia thus diverged from the EU average, where public expenditure on tertiary education as a share of GDP increased. The share of public expenditure on transfers to households is relatively high, which particularly applies to tertiary education, where the share increased even further in 2008. Within the structure of public expenditure on education (all levels), 7.9% was allocated for transfers to students and/or households3 in 2008, with the share gradually diminishing since 2001. Despite the decline, Slovenia's share of public expenditure allocated to transfers exceeded the average share in the EU in 2001-2007, and Slovenia was among the higher-ranking countries on this indicator. However, the share of public expenditure for transfers at the level of tertiary education deviates strongly from the EU average. At 22.8%, it was considerably above the EU average (17.0%) in 2007, and increased further in 2008. 1 Total public expenditure on education comprises the total budgetary expenditure on formal education of youth and adults at central and local levels. This includes direct public expenditure on educational institutions and transfers to households (grants, subsidised meals, transport, accommodation, textbooks, etc.). Financial data for Slovenia were collected in accordance with an internationally comparable methodology using the UOE questionnaire (the common questionnaire of UNESCO, OECD and Eurostat). 2 Calculations by IMAD. 3 Public transfers for education include grants, child benefits in the segment in which payments are additionally conditional on participation in education, subsidised transport, meals, accommodation, textbooks, learning technology and technical literature, etc.). Table: Total public expenditure on education as % of GDP 1995 2000 2001 2002 2003 2004 2005 2006 2007 EU-27 N/A 4.90 5.00 5.10 5.10 5.10 5.00 5.00 5.00 Austria 6.04 5.74 5.79 5.72 5.57 5.52 5.48 5.46 5.40 Belgium N/A N/A 6.00 6.10 6.03 5.96 5.93 6.00 6.02 Bulgaria 3.39 3.97 3.78 4.03 4.23 4.51 4.51 4.24 4.13 Cyprus 4.63 5.35 5.93 6.55 7.29 6.70 6.92 7.02 6.93 Czech Rep. N/A 3.97 4.09 4.32 4.51 4.37 4.26 4.60 4.20 Denmark 7.67 8.29 8.44 8.44 8.33 8.43 8.30 7.97 7.83 Estonia 5.88 6.10 5.28 5.48 5.29 4.92 4.88 4.75 4.85 Finland 6.85 5.89 6.04 6.21 6.44 6.43 6.31 6.19 5.91 France 6.04 6.03 5.94 5.88 5.90 5.79 5.65 5.58 5.59 Greece 2.87 3.39 3.50 3.57 3.56 3.82 4.04 N/A N/A Ireland 5.07 4.28 4.27 4.29 4.38 4.70 4.75 4.76 4.90 Italy 4.85 4.55 4.86 4.62 4.74 4.58 4.43 4.70 4.29 Latvia 6.19 5.64 5.64 5.71 5.32 5.07 5.06 5.07 5.00 Lithuania 5.12 5.90 5.89 5.84 5.16 5.19 4.90 4.84 4.67 Luxembourg 4.26 N/A 3.74 3.79 3.77 3.87 3.78 3.38 3.15 Hungary 5.39 4.42 5.01 5.38 5.89 5.41 5.47 5.42 5.20 Malta N/A 4.49 4.46 4.38 4.70 4.83 6.79 N/A 6.31 Germany 4.62 4.46 4.49 4.70 4.70 4.59 4.53 4.40 4.50 Netherland 5.06 4.96 5.06 5.15 5.42 5.46 5.48 5.46 5.32 Poland 5.10 4.89 5.42 5.41 5.35 5.41 5.47 5.25 4.91 Portugal 5.37 5.42 5.61 5.54 5.57 5.29 5.39 5.25 5.30 Romania N/A 2.86 3.25 3.51 3.45 3.28 3.48 N/A 4.25 Slovakia 5.01 3.93 4.00 4.30 4.30 4.20 3.85 3.80 3.62 Slovenia 5.72 5.78 5.89 5.78 5.82 5.76 5.73 5.72 5.16 Spain 4.66 4.28 4.23 4.25 4.28 4.25 4.23 4.27 4.35 Sweden 7.22 7.21 7.12 7.43 7.30 7.18 6.97 6.85 6.69 U.K. 5.02 4.46 4.57 5.11 5.24 5.16 5.36 5.47 5.39 Source of data: Eurostat Portal Page - Population and Social Conditions, 2010; Expenditure on formal education, Slovenia, 2005-2008 - final data - correction - SORS (2011); Expenditure on formal education, 2004 - SORS (2007); Expenditure on formal education, (2006) - SORS; Statistical Yearbook 2008 - SORS (2008). Notes: Indicators for Slovenia were calculated on the basis of the latest revision of GDP (October 2010); N/A - not available. Figure: Total public expenditure on formal education, by level of education, as % of GDP, Slovenia 3.0 2.5 2.0 Q_ Q 1.5 as 1.0 0.5 0.0 12000 ^;2007 12008 Pre-school Primary Upper secondary Source of data: Expenditure on formal education, Slovenia, 2005-2008 - final data - correction - SORS (2011). Note: Indicators for Slovenia were calculated on the basis of the latest revision of GDP (October 2010). Tertiary Private expenditure on education In 2008, the share of private expenditure1 in total expenditure on formal education dropped at all levels, except at the primary education level. In 2008, it totalled 11.6% for all levels of formal education, a 1.5 p.p. drop over the year before. In 2008, this ratio was affected by systemic changes, as well as the start of elimination of wage disparities in the public sector, which increased the volume of public expenditure on education. In terms of the share of private expenditure on education, Slovenia lagged behind the EU average in 2007 (latest international data available) after exceeding it in the preceding period. Of all education levels, pre-school education witnessed the highest share of private expenditure. At the preschool level, parents pay a contribution to cover the full cost of pre-school programmes. In 2000-2007, the share of private expenditure on pre-school education fell. It also fell in 2008, to 22.5% (a 1.3 p.p. drop over the year 2007). This decline was mainly due to amended legislation, which, starting with the school year 2008/2009, provides for free kindergarten for the second child in a family. At the primary-education level, parents pay the costs of meals, open-air school and several other contributions, while at the secondary-education level, they cover the costs of accommodation in residence halls, in addition to the costs of meals and other contributions. In private primary and secondary schools, however, parents also pay tuition fees. Tuition fees for adults enrolled in secondary education programmes that are not financed by the state2 but are paid from private sources. The share of private expenditure on primary education reached 8.2% in 2008, an increase over the year before, while the share of private expenditure on upper-secondary education dropped relative to the year before, to 8.7%. The reduction in the share of private expenditure on upper-secondary education since the school year 2008/2009 is attributable to the new system of subsidising secondary-school student meals, introducing the right to a subsidised cooked meal for every student. The share of private expenditure on tertiary education dropped significantly in 2008. At the tertiary level, private expenditure includes tuition fees, enrolment fees and other contributions, cost of accommodation in residence halls, etc. In 2008, private expenditure accounted for 16.2% of GDP, a 6.6 p.p. drop compared with the year before. The drop was attributable to a decrease in enrolment in part-time studies and a significant increase in enrolment in 2nd-level Bologna studies, which are publicly funded for full-time students.3 In the 2008/2009 academic year, no call for applications for pre-reform masters and specialist programmes was launched for first-year students, which led to a decrease in funds raised from tuition fees. With 22.8%, the share of private expenditure on tertiary education in 2007 was 0.3 p.p. above the EU average. In the 2001-2007 period, private expenditure on tertiary education as a share of GDP diminished in Slovenia, which is contrary to the EU average where it recorded a considerable increase. 1 Share of private expenditure on educational institutions in total expenditure on educational institutions (public and private expenditure). Private expenditure on educational institutions includes expenditure of households and other private entities paid directly to educational institutions (expenditure on school fees, meals, open-air school, accommodation for pupils and students in residence halls etc.). 2 Adult secondary education may be financed by the state as part of the Active Employment Policy (AEP) measures on the basis of the Education and Training Programme for the Unemployed and the Annual Adult Education Programme. 3 Pursuant to the Decree amending the Decree on budgetary financing of higher education and other university member institutions from 2004 to 2008, adopted in 2006, budget funding is provided to full-time students enrolled in post-secondary vocational and university degree programmes adopted prior to 11 June 2004, and to those enrolled in first- and second-level study programmes, excluding pre-graduation students at a higher-education institution in the current year. Table: Share of private expenditure for all levels of formal education in total expenditure on formal education, in % 1999 2000 2001 2002 2003 2004 2005 2006 2007 EU-27 12.2 11.5 10.9 11.1 11.4 11.9 12.7 12.6 13.5 Austria 5.1 5.8 5.6 6.7 5.5 7.2 8.6 10.8 9.0 Belgium 5.0 7.9 5.9 5.8 5.8 5.7 5.8 5.6 5.6 Bulgaria 12.7 14.7 16.3 15.2 14.7 14.3 13.9 15.2 15.0 Cyprus 34.0 34.9 18.8 19.4 17.4 16.6 16.7 16.6 17.5 Czech Rep. 12.4 10.1 9.4 5.5 7.9 12.7 12.4 11.1 11.3 Denmark 4.0 4.0 3.9 3.9 4.5 4.4 7.7 8.1 7.5 Estonia N/A N/A N/A N/A N/A N/A N/A N/A 6.5 Finland 2.2 2.0 2.2 2.2 2.1 2.1 2.2 2.5 2.5 France 8.1 8.8 8.9 9.0 9.0 9.0 9.2 9.1 9.0 Greece 6.7 6.2 5.8 4.6 5.5 4.7 6.0 N/A N/A Ireland 7.3 7.0 7.8 6.6 7.0 7.1 6.3 6.2 5.2 Italy 9.7 9.1 6.2 7.4 8.1 9.6 9.5 7.7 8.9 Latvia 9.8 11.1 12.7 13.5 14.5 14.8 13.8 12.0 10.4 Lithuania N/A N/A N/A N/A 8.8 9.0 9.8 9.2 9.3 Hungary 12.1 11.7 11.0 10.2 9.2 9.3 8.7 9.5 N/A Malta 6.1 10.6 17.4 13.4 24.7 8.5 5.3 N/A 5.7 Germany 19.2 18.9 18.6 16.7 17.4 17.7 18.0 14.8 14.6 Netherland 16.3 15.9 15.8 16.3 16.3 16.9 16.0 15.7 16.2 Poland 3.1 N/A N/A 10.8 11.1 9.9 9.3 9.5 9.4 Portugal 1.3 1.4 1.5 1.6 1.7 2.5 7.4 8.0 8.3 Romania 9.8 8.3 6.5 4.5 N/A N/A N/A N/A 10.8 Slovakia 2.2 3.6 2.9 4.7 9.8 16.0 16.1 14.8 13.8 Slovenia 13.6 14.9 13.7 13.9 13.7 13.7 13.0 12.8 13.1 Spain 17.7 12.6 12.2 11.6 11.4 12.9 11.4 11.1 12.7 Sweden 3.0 3.0 3.2 2.6 2.9 3.0 3.0 2.7 2.6 U.K. 16.3 14.8 15.3 15.6 16.0 16.1 19.9 24.7 30.5 Source of data: Eurostat Portal Page - Population Expenditure on formal education, Slovenia, 2005 Statistical Yearbook 2008 - SORS (2008). Note: No data available for Luxembourg: N/A - not and Social Conditions, 2011; Expenditure on formal education, ■2007 - SORS (2009); Expenditure on formal education, (2006) - Slovenia, 2005-2008 -SORS; Expenditure on - final data - correction -formal education; 2004 - SORS (2011); SORS (2007); Figure: Share of private expenditure on formal education in total expenditure on formal education, by education level, Slovenia, in % 30 25 20 10 12000 0 2007 12008 Pre-school Primary Upper secondary Tertiary Source of data: Expenditure on formal education, Slovenia, 2005-2008 - final data - correction - SORS (2011); Statistical Yearbook 2008 - SORS (2008). Expenditure on educational institutions per student Expenditure on educational institutions per student (measured in EUR PPS1) dropped in 2007 below the EU average. In addition to the ratio of students to teaching staff, expenditure on educational institutions is frequently used at the international level as an indicator of quality of education. Moreover, it is an indicator of the level of investment in education of individuals enrolled in formal-education programmes. In 2007 (the latest available data), expenditure on educational institutions per student at all levels of formal education totalled EUR PPS 6,055.4, slightly below the EU average (EUR PPS 6,250.7). Compared with the year before, this dropped, while the EU average increased. In the 2001-2007 period, expenditure on educational institutions per student measured in EUR PPS increased, with higher growth recorded than that in the EU. Low expenditure on educational institutions per student (in EUR PPS) is mainly due to a low level of this expenditure in tertiary education, which dropped further in 2007 (the latest data available). Expenditure on tertiary education amounted to EUR PPS 5,955.1 in 2007. Slovenia thus lagged significantly behind the EU average, which was EUR PPS 9,101.8. In contrast to Slovenia, the average expenditure on educational institutions per tertiary education student in the EU (in EUR PPS) increased in 2007, so that Slovenia's gap widened further. Slovenia also lagged considerably behind the EU average in terms of expenditure on educational institutions per tertiary-education student as a share of GDP per capita (Slovenia: 27.0%; the EU: 36.3%). In 2007, this expenditure diminished further (4.4 p.p.), falling even more behind the EU average. Expenditure on educational institutions as a share of GDP is comparable with the EU average, while expenditure on educational institutions per student is low (2007: 1.2%) as a result of the high level of participation in tertiary education, which is also due to the benefits arising from student status. In the period following 2000, participation in tertiary education rose rapidly in Slovenia, but expenditure on educational institutions as a share of GDP per capita dropped in 2000-2008. Consequently, expenditure on educational institutions per tertiary-education student as a share of GDP per capita also fell sharply in 2001-2007. However, expenditure per student (in EUR PPS) diminished only at the tertiary-education level in that period, falling further behind the EU average, which improved. 1 Purchasing Power Standard. Table: Annual expenditure on educational institutions per student, in purchasing power standards (EUR PPS) and in comparison with GDP per capita, 2001-2007 In EUR PPS Expenditure per student in comparison with GDP per capita, in % 2001 2005 2006 2007 2001 2005 2006 2007 EU-27 5081.1 5673.4 5936.0 6250.7 24.6 25.3 25.2 24.9 Austria 7001.9 8092.4 8633.5 8694.9 28.3 28.9 29.3 28.4 Belgium 6284.2 6431.4 6974.2 7263.8 25.7 23.9 25.0 25.2 Bulgaria 1326.2 1952.8 2131.4 2290.0 22.9 25.2 24.7 24.4 Cyprus 4953.1 6584.4 7136.3 7708.0 27.6 32.2 33.3 33.1 Czech Rep. 2786.5 3792.4 4411.9 4451.8 20.1 22.2 24.2 22.3 Denmark 7305.7 8092.7 8402.3 8595.4 28.9 29.1 28.6 28.5 Estonia N/A 2825.0 3181.5 3674.7 N/A 20.4 20.7 21.4 Finland 5285.8 6202.1 6400.9 6682.0 23.1 24.1 23.7 22.8 France 5931.3 6295.6 6493.9 6928.3 25.9 25.3 25.3 25.6 Greece 3237.7 4485.0 N/A N/A 18.9 21.7 N/A N/A Ireland 4636.5 6026.1 6516.3 7172.4 17.7 18.6 18.9 19.4 Italy 6384.6 5901.6 6438.5 6205.2 27.4 25.0 26.1 24.1 Latvia 1995.1 2682.7 3074.2 3665.5 26.0 24.6 25.2 26.4 Lithuania 1860.3 2447.4 2751.2 3174.4 22.7 20.6 21.0 21.5 Luxembourg N/A N/A N/A N/A N/A N/A N/A N/A Hungary N/A 3801.7 3995.1 N/A N/A 26.8 26.7 N/A Malta 3306.7 5914.3 N/A 6437.1 21.5 33.8 N/A 33.8 Germany 5815.2 6620.5 6474.1 6752.1 25.2 25.2 23.6 23.4 Netherland 6265.8 7317.3 7494.2 7891.0 23.7 24.9 24.2 24.0 Poland 2183.8 3068.2 3040.5 3225.9 23.2 26.6 24.8 23.8 Portugal 4037.2 4813.9 5016.3 5124.9 26.4 27.8 27.8 27.2 Romania N/A 1437.9 N/A N/A N/A 18.3 N/A N/A Slovakia 1845.6 2695.0 2936.3 3122.0 17.8 19.9 19.6 18.5 Slovenia 4647.5 5949.2 6248.5 6055.4 29.5 30.2 30.1 27.4 Spain 4526.5 5681.7 6169.8 6772.9 23.3 24.8 24.9 25.9 Sweden 6095.6 7029.8 7395.8 7906.5 25.4 26.0 25.8 25.9 U.K. 5152.4 7137.2 7925.4 7971.5 22.1 26.1 28.1 27.3 Source of data: Eurostat Portal Page - Population and Social Conditions, 2011. Note: PPS - Purchasing Power Standard; N/A - not available. Figure: Expenditure on educational institutions per student, in EUR PPS, tertiary education, 2007 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 CD Ti J? 3 CO Adult participation in education The level of adult participation in formal education1 diminished slightly in 2008 for the second year running, but was still above the EU average. In 2008, for which the most recent data are available, participation of adult population aged 25-64 in all levels of formal education reached 4.1%, a 0.2 p.p. drop over the year before. In 2008, it exceeded the EU average by 0.9 p.p. In the 2000-2008 period, adult participation in education increased by 1.6 p.p. in Slovenia, while it fell slightly for the EU as a whole. The highest rate of adult participation in formal education is recorded at the tertiary-education level. Participation in primary and upper-secondary education is low, which is also related to a low share of early school leavers.2 The share of population having completed no more than primary education amounted to 16.5% in the second quarter of the year. It rises with age and is still significantly high in the middle (35-44 years, 45-54 years) and higher age groups (55-64 years).3 In 2008, adult participation in upper-secondary education diminished for the third year in succession. It accounted for 0.7% and was 0.3 p.p. higher than on average in the EU. It dropped compared with the level in 2007, as it did in the EU. In the academic year 2009/2010, for which the latest data are available for Slovenia, participation in tertiary education totalled 3.2%, remaining at the previous year's level. In 2008, it was 0.9 p.p. higher than the EU average (2.4%). In 2000-2008, adult participation in secondary education rose by 0.2 p.p. and adult participation in tertiary education by 1.3 p.p. Adult participation in non-formal education was lower than the EU average only in the population group with a lower level of education. Adult participation in non-formal education varies in terms of gender, age, level of education and labour status. In 2009, female participation in non-formal education was higher than male participation, and also recorded a slightly higher increase. In the 25-34, 35-44 and 45-54 age groups, participation rates were similar (about 10%), while the participation rate in the 55-74 age group dropped (5.1%). Compared with the level in 2008, the participation rate rose in all age groups, except in the youngest. By level of education, participation is lowest in the population group with a lower level of education. Here, it lags considerably behind the participation of people with upper secondary and tertiary education, having increased least in this group among all education groups in 2009. With regard to activity status, the highest level of participation in non-formal education is recorded for people in employment, followed by unemployed people, while participation is lowest in the non-active population. In 2009, participation in non-formal education increased in all activity-status groups, and most in the group of the unemployed, and least in the non-active population. In all socio-economic groups, except those with a lower level of education, participation exceeds the EU average. In the 2004-2009 period, the only socio-economic group witnessing growth was the unemployed population; in the 55-74 age group the level remained unchanged, while in all other socio-economic groups it fell. Adult participation in non-formal education is also above the EU average, increasing even further in 2009. According to the Labour Force Survey, in 2009, for which the latest international data are available, participation of the adult population aged 25-64 in non-formal education4 was 9.2%, exceeding the EU average by 2.4 p.p. Compared with the previous year, it rose by 0.7 p.p. In 2004-2009, it fell, as did the EU average, but the decline in Slovenia was steeper (by 2.1 p.p.; EU: 0.6 p.p.). 1 Includes full-time and part-time students at all levels of formal education (primary, upper secondary and tertiary). 2 Percentage of the population aged 18-24 with at most lower-secondary education and not in further education or training. 3 According to the Labour Force Survey for Q2, it was 15.0% in the 35-44 age group in 2010, 20.0% in the 45-54 age group, and 26.2% in the 55-64 age group. 4 Internationally available data on adult participation in nonformal education in accordance with the Labour Force Survey are not available for the period since 2004. The indicator refers to the proportion of persons aged 25-64 receiving some form of lifelong learning in the four weeks preceding the survey. The indicator is calculated on the basis of the annual average of quarterly data. The European Commission has called attention to the methodological faults of the indicator. Table: Participation of the population aged 25-64 in formal and non-formal education, EU-27, in % Participation in all levels of formal education 1998 2000 2005 2007 2008 2004 2005 2008 2009 EU-27 2.8 3.3 4.2 3.1 3.2 7.4 7.0 6.9 6.8 Austria 3.2 3.4 2.6 3.0 3.3 10.6 10.5 10.5 10.8 Belgium N/A 5.2 7.4 7.5 7.7 7.8 6.5 4.9 4.8 Bulgaria 1.5 1.5 1.7 1.9 2.1 0.3 0.2 0.4 0.4 Cyprus N/A 0.3 1.0 1.3 1.6 8.1 4.8 6.4 4.9 Czech Rep. 1.0 1.1 2.7 2.9 2.5 4.9 3.9 6.0 4.9 Denmark 4.7 5.0 6.7 6.6 6.3 20.3 22.0 26.5 27.7 Estonia N/A 2.4 4.4 4.5 4.3 3.0 2.4 6.6 6.7 Finland 5.6 6.9 9.5 10.2 10.5 17.4 16.4 16.4 15.6 France N/A 1.2 1.5 1.5 1.4 7.2 6.5 5.4 5.4 Greece 0.9 0.6 3.0 3.8 N/A 0.7 0.6 1.4 1.8 Ireland 1.7 2.0 2.8 3.4 2.8 4.2 4.1 3.9 2.7 Italy 1.7 1.9 2.2 2.2 2.0 4.1 3.0 3.5 3.3 Latvia 1.5 2.9 4.7 4.7 4.4 4.5 3.8 2.9 2.5 Lithuania 0.9 1.6 4.2 4.2 4.0 3.6 2.8 2.1 1.5 Luxembourg N/A 0.3 0.4 0.3 0.7 8.9 7.4 7.0 11.8 Hungary 1.5 2.3 4.0 3.9 3.5 1.8 1.5 1.2 0.9 Malta 0.0 0.8 1.9 1.3 1.1 4.1 4.4 5.1 5.0 Germany 2.6 2.4 2.3 2.3 2.5 5.3 5.2 5.4 5.2 Netherland 2.9 2.6 2.5 2.5 2.6 10.3 9.2 10.1 10.0 Poland 1.6 2.0 2.7 2.6 2.5 2.7 1.8 2.0 1.9 Portugal 2.8 3.3 3.3 3.0 6.5 2.0 1.3 1.5 1.8 Romania 0.6 0.7 1.8 2.6 3.0 0.4 0.2 0.2 N/A Slovakia N/A N/A 2.2 2.7 3.0 3.4 3.2 1.7 1.2 Slovenia 1.5 2.5 4.4 4.3 4.1 11.3 9.5 8.5 9.2 Spain 2.4 2.5 3.8 3.8 3.7 2.9 8.0 8.4 8.3 Sweden 9.0 10.3 9.4 9.0 8.8 30.2 16.4 17.7 17.6 U.K. 7.1 11.0 14.0 4.3 4.1 32.1 25.2 17.9 17.9 Participation in all levels of non-formal education1 Source of data: Eurostat Portal Page - Population and social conditions - Education Note: 1 Data on adult participation in non-formal education are available from 2004 and training, 2011. onwards, N/A - not available. Figure: Participation of population aged 25-64 in individual levels of formal education, 2008, in % 12 10 8 6 4 2 0 ^ Tertiary ■ Secondary I Low Gross domestic expenditure on research and development Gross domestic expenditure on R&D (GERD) was 1.86% of GDP in 2009. As in 2008, this figure was, along with the real growth in GERD, once more a result of a higher number of reporting units in the Slovenian business sector,1 but also of a considerable shrinkage of GDP in 2009. In real terms, GERD increased by 5.5%, totalling EUR 656.9 m. Slovenia's gap behind the European average narrowed to 0.15 p.p., which is the lowest value so far. The narrowing of the gap was also influenced by the movement of GERD in the EU average, as it dropped by 2.3% in real terms, and to the fact that the real shrinkage of GDP in Slovenia (by 8.1%) significantly exceeded the EU average (by 3.9 p.p.). The share of the business sector in the funding of GERD diminished noticeably in 2009. The decline in companies' financial capabilities in 2009 resulted in a 2.6% drop in R&D investment of the business sector in real terms, with its share in funding of GERD thus dropping to 58.0% (by 4.8 p.p.). Amid a considerable contraction of the economy, the business sector's expenditure as a share of GDP nevertheless increased in 2009 for the second year running, reaching 1.08% of GDP.2 With the R&D expenditure of the European business sector recording slower growth, Slovenia's business sector almost caught up with the EU average as early as 2008 (1.05% of GDP, Slovenia: 1.04%). The measures adopted by the Government to boost competitiveness in 2009 brought about an increase in the government sector's expenditure on R&D in real terms, which was reflected in a higher share of this expenditure (35.7%) in total expenditure on R&D (see Figure). In 2000-2009, the shares of the higher education sector and funds from abroad in the funding of GERD were fairly steady, while in the past two years, foreign funds rose in real terms (2008: by 13.2%, 2009: by 14.0%). The number of taxpayers claiming tax relief in relation to investment in R&D, and the volume of relief claimed diminished in 2009. The consequences of the financial and economic crisis3 contributed to a considerable 1 The number of reporting units covered increased by 54 companies. 2 In accordance with the Europe 2020 strategy, Slovenia's goal is to increase expenditure on R&D to 3% of GDP, with the focus on improvement of R&D funding conditions and opportunities (Europe 2020, 2010). 3 The volume of collected corporate income tax decreased in 2008-2010, amounting to EUR 1,257 m, EUR 712 m and EUR 449 m (realisation before tax assessment), respectively. reduction in the volume of tax relief on investment in R&D in 2009, despite increased government-budget appropriations for R&D4 as part of anti-crisis measures. Their amount dropped for the first time since 2006 when they were introduced on the basis of the Corporate IncomeTax Act.5 Tax relief on R&D investment was claimed by 418 taxpayers (2008: 483), but its volume diminished significantly, by 22.0%, to EUR 48.8 m. Almost three fifths of relief were claimed by 28 taxpayers in the manufacture of pharmaceutical ingredients and preparations (37.6%), motor vehicles, trailers and semi-trailers (10.7%), and computers, electronic and optical equipment (9.6%). Furthermore, the volume of claimed regional tax relief for R&D also dropped, by 26.8%, to EUR 9.8 m. This was claimed by 164 taxpayers and was concentrated on an even smaller number of eligible legal entities than the basic tax relief on R&D. In 2009, the share of researchers working in the business sector again climbed slightly, which is extremely important in terms of transfer of (new) knowledge and the sector's absorption capacity. The total number of researchers6 rose by 5.9%, with the highest increase recorded in the higher-education and business sectors (by 10.2% and 7.2%, respectively). The business sector once more employed the largest share of researchers in 2009, 44.0%, which is the highest figure since 2000 (31.8%). The number of researchers working in the business sector grew by an annual average rate of 10.1% in 2000-2009. In 2008,7 Slovenia's business sector came very close to the European average in the share of researchers employed, lagging by a mere 2.4 p.p., the smallest gap in the 2000-2008 period (2000: 15.1 p.p.). 4 In nominal terms, government budget appropriations for R&D grew by 46% in 2009, and in 2010, according to preliminary figures, by 21%. 5 Corporate Income Tax Act (OG RS Nos. 117/06, 56/08, 76/08, 5/09 and 96/09). In 2010 (OG RS No. 43/10), the general tax relief on R&D investment increased from 20% to 40% of the invested amount, with other conditions regarding claims remaining unchanged. The higher general tax relief on R&D investment also resulted in an increase in total tax relief in regions that fulfil specific conditions regarding the level of development, to 50% (from 30%) and 60% (from 40%) of the amount invested in R&D, respectively. 6 The number of researchers is expressed as a full-time equivalent, with the analysis only including researchers (excluding technical and other staff). 7 Latest available data for the EU-27. Table: Gross domestic expenditure on R&D in Slovenia and some EU Member States, in % of GDP 1996 2000 2005 2006 2007 2008 2009 EU-27 1.75 1.86 1.82 1.85 1.85 1.92 2.01 Austria 1.60 1.94 2.45 2.46 2.52 2.67 2.75 Czech Rep. 0.97 1.21 1.41 1.55 1.54 1.47 1.53 Estonia N/A 0.60 0.93 1.13 1.10 1.29 1.42 Finland 2.53 3.35 3.48 3.48 3.47 3.72 3.96 Italy 0.99 1.05 1.09 1.13 1.18 1.23 1.27 Latvia 0.42 0.44 0.56 0.70 0.59 0.61 0.46 Lithuania 0.49 0.59 0.75 0.79 0.81 0.80 0.84 Hungary 0.63 0.79 0.95 1.00 0.97 1.00 1.15 Germany 2.19 2.45 2.49 2.53 2.53 2.68 2.82 Poland 0.65 0.64 0.57 0.56 0.57 0.60 0.59 Portugal 0.56 0.73 0.78 0.99 1.17 1.50 1.66 Slovakia 0.91 0.65 0.51 0.49 0.46 0.47 0.48 Slovenia 1.29 1.39 1.44 1.56 1.45 1.65 1.86 Spain 0.81 0.91 1.12 1.20 1.27 1.35 1.38 Source of data: Eurostat Portal Page - Science and Technology- Research and Development, 2010. Notes: Data for 2009 for Austria, Estonia, Italy, Germany and Portugal are not final; data for EU-27 are Eurostat estimates; N/A - no data available. Figure: Gross domestic R&D expenditure by source of funds, Slovenia, 2000-2009, in %1 ■ 2000 K 2005 2006 ^ 2008 70 12009 60 50 40 30 20 10 0 Business sector Government sector Funds from abroad Source: Research and development activity, Slovenia, 2000-2009 (SORS), 2010. Note: 1 Due to their small shares, the higher-education and private non-profit sectors are not shown in the GERD funding structure (in 2005-2009, they contributed on average 0.4% to the total GERD). Science and technology graduates The number and share of science and technology graduates1 are increasing, but the gap behind the EU average is still wide. In 20092, the number of science and technology graduates rose for the third consecutive year (by 6.6% to 3,237). The number of science and technology graduates per 1,000 population aged 20-29 is therefore also rising, reaching 11.4 in 2009. In 2009, the share of science and technology graduates in the total number of tertiary-education graduates grew for the third consecutive year and reached 18.8%, but was still lower than the level in 2000 (22.8%). In 2008, Slovenia was also behind the EU average on this figure, and the gap was wider than in 2000 (see Table). Slovenia also recorded a significant gap behind the EU average in the share of graduates (2008: 4.3 p.p.) (see Figure), which was also wider than in 2000. The share of doctors in the field of science and technology is high, but fell in 2009. In 2009, their number rose by 14.1%, to 227, a considerable increase over the number in 2000. In terms of the share of doctors of science and technology in the total number, Slovenia also exceeds the EU average (2008: Slovenia: 49.1%; EU: 36.8%), but this share diminished in 2004-2008, as in the EU. In Slovenia, this trend continued into 2009. The large share of doctors of science and technology is related to measures taken by the state to foster enrolment (the Young Researchers programme, which requires that a certain share of young researchers comes from the field of science and technology, and the Young Researchers for Business and Industry programme, where a large share is accounted for by young researchers in science and technology). Due to the growth in the number of students enrolled in science and technology studies over recent years, the gap behind the EU average narrowed significantly in 2008. The share has been rising for several years, reaching 25.6% in 2009/2010. In 2008, it drew much closer to the EU average, lagging by only 0.3 p.p., which is the least in the whole 2000-2008 period. In 2009/2010, the number of students enrolled in science and technology studies increased by 2.0% and amounted to 29,419, but its growth slowed relative to previous years. Despite the relatively favourable trend in enrolment in science and technology, the number of science and technology graduates is too low due to lower enrolment in previous years, largely as a result of insufficient government incentives for undergraduate science and technology studies. Enrolment in science and technology can also be boosted by company scholarships. However, the share of science and technology students receiving company scholarships is relatively small and fell even further in 2009/2010. The slow growth in the number of science and technology graduates is also due to the low efficiency of studies (i.e. the long average duration of studies). 1 Science and technology indicators according to ISCED 97 comprise two broader fields, i.e. "science, mathematics and computing" (ISC 42, 44, 46 and 48) and "engineering, manufacturing and construction" (ISC 52, 54 and 58). The classification is based on the International Standard Classification of Education (ISCED) 1997 and Eurostat's Fields of Education and Training Manual 1999. The indicators cover the total number of graduates of tertiary education in the field of science and technology who completed their studies in the observed calendar year. 2 Data on graduates refer to calendar years (the latest to 2009), and those on students enrolled in the 2000/2001-2009/2010 period. Table: Number of science and technology graduates per 1,000 population aged 20-29, 1998-2008 1998 2000 2005 2006 2007 2008 EU-27 8.8 10.1 13.2 13.0 13.4 13.9 Austria 7.9 7.2 9.8 10.8 11.0 11.8 Belgium N/A 9.7 10.9 10.6 14.0 11.6 Bulgaria 5.5 6.6 8.6 8.5 8.4 9.1 Cyprus N/A 3.4 3.6 4.3 4.2 4.0 Czech Rep. 4.6 5.5 8.2 10.0 12.0 15.0 Denmark 8.1 11.7 14.7 13.8 16.4 15.5 Estonia 3.3 7.8 12.1 11.2 13.3 11.4 Finland 15.9 16.0 18.1 17.9 18.8 24.3 France 18.5 19.6 22.5 20.7 20.5 20.1 Greece N/A N/A 10.1 N/A 8.5 11.2 Ireland 22.9 24.2 24.5 21.4 18.7 19.5 Italy 5.1 5.7 12.4 13.0 8.2 7.6 Latvia 6.1 7.4 9.8 8.9 9.2 8.8 Lithuania 9.3 13.5 18.9 19.5 18.1 17.8 Luxembourg 1.4 1.8 N/A N/A N/A 1.8 Hungary 5.0 4.5 5.1 5.8 6.4 6.1 Malta 1.3 3.4 3.4 5.0 7.1 6.0 Germany 8.8 8.2 9.7 10.7 11.4 12.5 Netherland 6.0 5.8 8.6 9.0 8.9 8.8 Poland 4.9 6.6 11.1 13.3 13.9 14.1 Portugal 5.2 6.3 12.0 12.6 18.1 20.7 Romania 4.2 4.5 10.3 10.5 11.9 15.2 Slovakia 4.3 5.3 10.2 10.3 11.9 15.0 Slovenia 8.0 8.9 9.8 9.5 9.8 10.4 Spain 8.0 9.9 11.8 11.5 11.2 11.6 Sweden 7.9 11.6 14.4 15.1 13.6 13.2 U.K. 15.5 18.5 18.4 17.9 17.5 17.6 Source of data: Eurostat Portal Page - Population and Social Conditions - Education and training, 2011; SI-STAT Data Portal - Demography and social statistics - Education, 2011. Note: N/A - not available. Figure: Share of science and technology graduates in the total number of graduates, EU, 2008, in % 40 35 30 25 20 15 10 5 0 It. C JŠ -13 C^ I .;5 c .:= .-ii to Innovation-active enterprises In a three-year period (2006-2008), Slovenia, like the majority of EU countries, recorded a drop in the share of innovation-active enterprises. In 2006-2008, 50.3% of enterprises in Slovenia were innovation active, the share being slightly higher in manufacturing (54.6%), and lower in services (46.1%). Since these data are methodologically incomparable1 with those for the previous period (20042006), changes can only be inferred taking account of the previous definition2 of innovation activity, according to which 34.3% of Slovenia's enterprises introduced a technological innovation in 2006-2008 (2004-2006: 35.1%). The intensity of innovation activity in enterprises diminished, as it did in most of the EU, particularly in larger countries. The results are not encouraging, given that that these figures are for the period when the international economic and financial crisis had only just set in.3 In most cases, innovation-active enterprises simultaneously introduced both technological and non-technological innovations. Regardless of their activity, Slovenia's innovation-active enterprises mostly introduced both technological and non-technological innovations in 2006-2008. These enterprises accounted for more than one fifth (see Table) (in manufacturing for as much as 29.0%). This corroborates the statement that technological and non-technological innovations are intertwined and interdependent, as services are a key element of business processes regardless of the company activity. At the same time it emphasises the significance of innovation across the entire value added chain and not only in the development of a new product. In terms of innovation, service sectors lag4 behind manufacturing in Slovenia, as well as in most other countries of the EU. The share of innovation active Slovenian enterprises in knowledge-based services accounts for 61%, ranging between 46% (M 71) and 83% (J 62). Innovation activity achieved by enterprises is growing with their size. In the 2006-2008 period, the share of small and medium-sized innovation-active enterprises drew very close to the EU average (Slovenia: small -44.5%, EU: 47.7%; Slovenia: medium-sized - 63.4%, EU: 63.7%), while the share of large enterprises exceeded the EU average by 10.4 p.p. (Slovenia 89.2%). In Slovenia, the share of small-sized non-innovative-active enterprises remains high, which is, at least to a certain extent, due to the fact that their foundation is frequently driven by necessity rather than being a result of penetrating innovative ideas. Slovenia's progress in the area of innovation capacity is too slow, yet constant. According to the latest data for the composite innovation indicator for 20105 based on 2007-2009 data, Slovenia was ranked among the innovation followers for the second year running. With an indicator value of 0.487, Slovenia drew close to the EU average (0.516), sharing the leading position in the group with Estonia on account of the high average annual-growth rate (6.5%). Slovenia's innovation environment nevertheless shows a gap between innovation inputs and outputs,6 as pointed out by both the European Commission and OECD. The innovation gap can be partly explained by the fact that innovation policy instruments have a relatively fast impact on factors entering the innovation process, and a typically slower impact on results, particularly because these are usually conditional on economic restructuring (Bučar et al., 2010). 1 The most recent statistical survey of innovation activities for the 2006-2008 period used the changed definition of innovation-active enterprises, taking into account the introduction of technological and/or non-technological innovations (innovations in the field of marketing and/or organisation). Further explanations about methodological changes are provided by SORS (Innovation activity in manufacturing and selected services, 2010 a). Consequently, caution is needed in the interpretation of comparisons with data on past innovation activities. 2 Innovation-active enterprises were those introducing merely technological innovations (a new or significantly upgraded product and/or service and/or manufacturing procedure). 3 VTo a certain extent, the results are probably due to changes in methodology, as, with a newly introduced category (technological and non-technological innovations combined), a greater number of enterprises decided on this answer rather than reporting merely technological innovations. 4 This is also due to inadequate collection of data on innovations in the service sector not taking into account public services, due to insufficient knowledge of the specificity of innovation activities in services, as well as insufficient competition and level of development of services. 5 Innovation Union Scoreboard 2010, 2011. 6 A high level of business-sector investment in R&D (input), the number of innovation-active enterprises and the number of patent applications (output). Table: Innovation-active enterprises by type of innovation activity, 2006-2008, in % of total number of enterprises ■o ^ ^ 1- u U N A S 1- . s nn Z S E E^ E S s ch. ions EU-271 51.6 N/A N/A N/A 54.5 N/A N/A N/A 48.5 N/A N/A N/A Austria 56.2 11.9 13.3 31.0 59.4 16.4 9.9 33.1 53.8 8.3 15.9 29.5 Belgium 58.1 13.1 10.2 34.8 63.0 16.8 9.0 37.2 54.8 10.4 11.2 33.2 Czech Rep. 56.0 9.0 16.7 30.3 56.4 10.9 13.1 32.4 56.9 6.7 21.1 29.0 Finland 52.2 19.2 5.5 27.5 57.1 24.7 3.0 29.4 48.6 13.9 7.6 27.1 Italy 53.2 12.1 13.1 28.1 56.0 14.4 11.8 29.8 48.1 7.4 15.8 24.9 Latvia 24.3 9.4 4.1 10.7 30.9 15.4 2.8 12.7 19.3 4.8 4.8 9.7 Hungary 28.9 7.1 8.2 13.7 28.4 8.2 6.8 13.4 29.6 5.1 10.1 14.3 Germany 79.9 10.9 16.2 52.9 86.3 12.4 12.9 61.0 73.6 9.1 19.2 45.3 Poland 27.9 7.9 8.1 11.9 29.2 9.1 7.2 12.8 26.1 5.9 9.5 10.7 Portugal 57.8 13.3 7.7 36.8 54.1 14.9 6.2 32.9 63.9 10.2 10.1 43.5 Slovakia 36.1 6.4 14.4 15.3 37.3 7.3 10.7 19.2 35.0 4.8 18.5 11.7 Slovenia 50.3 9.1 15.9 25.2 54.6 11.7 13.9 29.0 46.1 5.8 18.7 21.6 Spain 43.5 12.6 11.7 19.3 44.7 14.6 9.9 20.3 42.6 10.4 13.7 18.5 Source of data: Eurostat Portal Page - Science and Technology - Community innovation survey, 2010; calculations by IMAD. Notes: 1 The EU-27 aggregate does not include data for Greece. The innovation-active enterprise introduced technological innovations and/or non-technological innovations and/ or both technological and non-technological innovations. N/A - not available. 2004 -2006 2006 -2008 Figure: Share of innovation active enterprises introducing technological innovations* in 2006-2008, in % of total number of enterprises 70 -:-:-:-:-:-^-^-1-1- 60 50 40 J= 30 20 10 0 != CÜ 13 £ 'iZ ■Ö C CD JB -o c CD CÜ CO LU Li^ £ — J^ ä Source of data: Eurostat Portal Page - Science and technology - Community innovation survey, 2010; calculations by IMAD. Note: * Data are comparable with those from the previous statistical survey on innovation activity for the 2004-2006 period, not excluding the possibility that enterprises may have also introduced non-technological innovations. Intellectual property Slovenia continues to trail the European average by a wide margin on the number of patent applications filed with the EPO (European Patent Office). Provisional data show that in 20091 Slovenian applicants filed 58.6 patent applications per million population, while the European average was 123.6. Compared with 2008, the number of patent applications dropped by 8% in 2009, compared to a 6% fall across the EU-27. The gap behind the EU average did not change significantly in 2006-2009 (2006: 66; 2009: 65 patent applications per million population fewer than in the EU). By number of patent applications filed with the EPO, Slovenia was ranked 14th among the EU countries in 2009, ranking even above some Old Member States (Spain, Portugal and Greece). However, the data on national patent applications2 filed with the IPO (Intellectual Property Office of the Republic of Slovenia) for 2008-2010 are highly promising, showing much faster annual growth in recent years (2008-2010: 19.2%). In this period, Slovenian applicants filed a total of 1,157 national patent applications with IPO (2008: 318, 2009: 387, 2010: 452) and were granted 461 patents (2008: 222, 2009: 239). filed by Slovenian applicants were in three categories on the basis of the International Classification:6 35 - advertising, business management and business administration; 42 - scientific and technological services, and research and design relating thereto; development of computer hardware and software; and 9 - scientific and computer apparatus and instruments. The majority of Slovenian companies that filed trade-mark protection applications with OHIM came from the food-processing industry (Alicante News, 2010). In 2010, Slovenian applicants registered 65 Community designs7 per million population with OHIM, which was 56% of the EU average. This was the smallest gap behind the EU average in the entire period for which data are available.8 Slovenia has recorded substantial progress in the area of Community trade marks and designs. In 2010, Slovenia filed 110.9 applications for Community trade marks3 per million population with the Office of Harmonisation in the Internal Market (OHIM),4 increasing the number of applications by an average of 19.2% a year in the 2004-2010 period.5 In 2010, the average number of applications in EU was 140.2 Community trade marks per million population; Slovenia therefore achieved 79.1% of the EU average. The best result was recorded in 2008 (84.9%). The majority of goods and services for which applications for Community trade-mark protection were 1 The data on patent applications filed in 2008 and 2009 are taken from the EPO Annual Report, and refer to the current year. These are not necessarily the first patent applications on a global scale as released by Eurostat (for more information, see the Slovenian Economic Mirror 2/2009). 2 Guaranteeing legal protection of inventions in the territory of Slovenia since the patent-application filing date. 3 A trade mark/service mark is a legally protected combination of signs enabling identification and distinction of an identical or similar product/service, and having graphic presentation characteristics. Trade-mark protection lasts for 10 years from the application filing date and can be renewed (IPO Annual Report 2009, 2010). 4 Office for Harmonisation in the Internal Market. 5 Since 2004, Slovenia has also been able to obtain legal protection of a trade mark/service mark following the European procedure, the right to legal protection being effective and safeguarded as of the application filing date in all EU countries. Before 2004, trade-mark protection applications could be filed only according to the national application procedure at the Intellectual Property Office of the Republic of Slovenia or through international application with the World Intellectual Property Organisation (IPO Annual Report 2009, 2010). 6 International classification of products and services due to trade-mark registration on the basis of the Nice Agreement (Intellectual Property Act, OG RS No.102/04). 7 A design is a legally protected visual appearance that is novel and unique. Its protection is effective for a period of 5 years and can be renewed (IPO Annual Report 2009, 2010). 8 When applying for Community design protection, Slovenian applicants have since 2004 also been able to follow the European application procedure via OHIM. Table: Patent applications filed with EPO by year of first filing,1 per million population 2000 2004 2005 2006 20072 20083 20093 EU-27 106.4 111.6 112.6 113.9 116.5 131.44 123.64 Austria 147.1 175.5 180.0 203.5 217.0 180.7 180.0 Belgium 126.6 141.8 135.6 136.4 139.0 178.0 151.6 Bulgaria 0.9 2.4 3.1 3.5 3.8 2.0 2.2 Cyprus 10.4 8.2 21.4 9.6 11.5 71.0 57.7 Czech Rep. 6.5 11.1 10.4 14.7 15.8 10.6 13.0 Denmark 177.1 191.8 202.1 193.7 194.1 289.3 270.0 Estonia 4.1 6.4 4.7 15.0 17.4 5.2 25.4 Finland 274.6 264.0 247.1 248.6 250.8 340.0 271.7 France 120.4 133.4 130.7 130.9 132.4 142.1 138.7 Greece 5.1 6.1 9.9 9.3 9.8 7.9 9.1 Ireland 54.3 64.6 63.7 64.4 66.8 110.0 110.1 Italy 7.1 79.4 82.3 83.6 86.4 73.1 64.6 Latvia 3.3 4.2 8.0 7.2 8.4 18.5 21.7 Lithuania 1.3 4.0 2.6 2.8 2.4 3.3 3.9 Luxembourg 186.1 247.7 209.2 221.4 230.2 566.4 593.7 Hungary 11.8 15.4 13.4 16.0 17.2 10.8 11.4 Malta 11.8 11.3 27.9 18.9 20.5 65.8 149.9 Germany 267.8 276.2 283.7 283.6 290.7 324.3 306.2 Netherland 216.8 221.3 208.2 220.5 223.5 448.6 408.7 Poland 1.1 3.2 3.2 3.6 3.8 4.4 4.5 Portugal 4.1 5.6 11.0 10.1 11.4 8.0 10.1 Romania 0.3 1.1 1.3 0.9 1.0 0.8 0.6 Slovakia 2.1 3.8 5.7 7.3 7.8 5.2 4.6 Slovenia 25.5 57.5 53.4 48.2 51.5 63.7 58.6 Spain 20.0 28.6 31.0 30.2 32.6 29.3 27.5 Sweden 258.0 246.2 260.1 280.0 298.4 341.3 340.0 U.K. 102.1 90.9 88.5 89.8 89.2 82.2 78.3 Source of data: Eurostat Portal Page - Science and Technology - Patent Statistics, 2011; EPO Annual Report 2009, 2010. Note: 1 Data for 2008, 2009 relate to patent applications that are not necessarily the first on a global scale but were filed with the EPO in the current year (EPO Annual Report 2009, 2010); 2 Eurostat estimate; 3 provisional data; 4 an estimate by IMAD based on calculations for Member States. Figure: Number of trade mark and registered Community design applications per million population ■ Slovenia ■ EU-27 160 140 120 100 m 80 u z 60 40 20 0 2008 Community trade marks Source of data: OHIM Web Page, 2011; calculations by IMAD. Note: Data for 2004 relate to EU-25. 2010 2004 2008 Community designs Internet use and access Use of the Internet increased significantly again in 2010. The share of regular Internet users thus caught up with the EU average, but Slovenia still lags behind the EU in the use of more advanced e-services. Following a slowdown of Internet use in 2007 and 2008, Slovenia has seen fast changes in this area over the past two years. In the first quarter of 2010, 68% of the population aged 16-74 were Internet users, while the share of regular users using the Internet at least once a week reached 65%, a share equal to that in EU. It is encouraging that the share of everyday Internet users grew considerably in both 2009 and 2010. According to this indicator, Slovenia also reached the EU average in 2010. The positive trends from 2009 also continued with regard to the age and education structure of Internet users, but, despite the progress (more than 10 p.p.), Slovenia still has a relatively wide gap to the EU in the share of elderly Internet users (55-74 years), which is narrowing only slowly. However, significant shifts in the past two years have narrowed the gap behind the EU in Internet users with a low level of education and, in the last year, also in the group of Internet users with secondary education. In other population groups (young people, the middle-aged population, people with a higher education), Slovenia has a larger share of Internet users than the EU average. In addition to the prevalence of Internet use, the purpose of Internet use is also important, with the use of advanced and more sophisticated e-services becoming increasingly important in terms of development. In most e-services covered in statistical surveys, the share of Internet users is otherwise identical to or higher in Slovenia than the EU average, but the use of advanced services shows a considerable gap in the prevalence of e-banking and online shopping and the proportion of people interacting with public administration exclusively in electronic form. This is somewhat surprising, given that the figures on e-skills in Slovenia show a relatively favourable picture. Moreover, Slovenian users do not differ significantly from EU users in their attitude to e-safety. Slovenia, this gap relative to the EU is probably due to Slovenia having a relatively higher share (compared to EU) of households with dependent children, which have Internet access, while it lags behind the EU in the share of childless households with Internet access. The figures show that the frequency of I nternet access at work and in educational institutions in Slovenia is slightly higher than in the EU, which can partly explain the relatively lower share of childless households with Internet access. The availability of regular high-speed Internet access is of key importance for the use of advanced and sophisticated e-services, and Slovenia still faces relatively substantial barriers in this area compared with the EU. The main reasons for not having broadband Internet access stated more frequently by Slovenian households than by those across the EU are: (i) lack of broadband Internet access in the respective territory, (ii) the fact that some family members have Internet access elsewhere (e.g. at work etc.), (iii) the outstanding proportion of individuals that find this type of connection too expensive in Slovenia. This calls for further improvement on the supply side, both in terms of availability and cost of services, for which a sufficient level of competition among telecommunication service providers and their efficient supervision are of key importance. Over the past three years, access to Internet at home, an important factor in regular Internet use and the use of more advanced e-services, started to fall slightly behind the EU average. The share of households with Internet access at home reached 68% in the first quarter of 2010 and was slightly below the EU average for the third consecutive year, after exceeding it in the period before 2007. The major reasons for the increase in recent years is the expansion of broadband Internet access (62% of households in 2010), which has been almost identical to the EU average for several years now. Slovenia nevertheless lags behind the EU according to the share of population with broadband Internet access at home (22.7% in 2010), with a gap persisting at around 2 p.p. for several years. Given the relatively high share of households with broadband Internet access in Table: Internet use and access, Slovenia, 2004-20101, in % 2005 2006 2007 2008 2009 2010 EU 2010 Households with Internet access at home, in % 48 54 58 59 64 68 70 Household with broadband Internet access at home, in % 19 34 44 50 56 62 61 Regular Internet users2 , total: 16-74 years 40 47 49 52 58 65 65 By age: 16-24 years 81 83 91 95 97 90 25-54 years 54 57 60 68 76 73 55-74 years 12 12 16 20 26 37 By education level: Low (or unskilled) 19 23 28 36 41 44 Secondary 40 47 49 52 56 65 69 Higher 87 88 86 92 93 90 Source of data. SORS. Notes: 1 Data for all the years refer to the first quarter of the year. 2 Those using the Internet at least once a week. Figure: Share of Internet users1 by end-use purpose, in % of population aged 16-74 E-mail Finding information Finding information on education Reading of newspapers E-government - finding information Radio listening/TV watching Uploading self-created content E-government - online forms E-banking Online shopping Job searching E-government- returning filled-in forms 10 15 20 25 30 35 In % 40 45 50 55 60 Source of data: Eurostat Portal Page - Information Society, 2011. Note: 1 The share of users who used the Internet in the past three months. 65 0 THE THIRD PRIORITY: An efficient and less costly state General government expenditure Economic structure of taxes and contributions Subsidies State aid General government expenditure Despite the changed structure, general government expenditure relative to GDP in 2010 stood at the 2009 level (49% of GDP). The share of social benefits and benefits in cash and kind rose (by 0.4 p.p. of GDP) mainly as a result of problems in the labour market and higher expenditure on unemployment benefits and on other social benefits and benefits in cash and kind. Although their adjustment was restricted by an emergency act, the number of beneficiaries of various forms of benefits rose fast. The adoption of anti-crisis measures led to a higher share of subsidies (by 0.3 p.p. of GDP), while general government borrowing increased the share of expenditure on interest payments (0.3 p.p. of GDP). The share of compensation of employees remained at the previous year's level despite a 1.5% rise in the number of employees in the public sector and a restrictive wage policy. A similar share was recorded in intermediate consumption following the adoption of rationalisation measures. A considerable decrease was achieved in gross capital formation and capital transfers (by 0.6 p.p. of GDP). In the period 2005-2010, general government expenditure grew by 3.8 p.p. of GDP; the increase was most pronounced in expenditure on social benefits and benefits in cash and kind, gross capital formation, and compensation of employees. Between 2005 and 2007, the share of compensation of employees (2005: 11.5%; 2010: 12.4% of GDP) gradually reduced due to the restrictive wage policy prior to EU accession, only to rise again in 2008 and 2009, following the wage reform and growing employment in the public sector. It remained at the 2009 level in 2010 thanks to a restrictive wage policy. The share of social benefits and benefits in cash and kind (2005: 17.7%; 2010: 19.1% of GDP) began to decelerate after 2005, most markedly in 2007, when a new mechanism to adjust transfers only with inflation was put in place. In 2008, the share of social transfers picked up once more as a result of the introduction of indexation of transfers twice a year, high indexation of pensions and disbursement of the one-off pension allowance. Increases in 2009 and 2010 were mainly due to the rapidly growing number of the unemployed and other beneficiaries to social benefits during the economic crisis, despite a restrictive approach toward the increase of such expenditure. In this period, considerable growth was also recorded in expenditure on gross capital formation (2005: 3.2%; 2010: 4.3% of GDP). Following a period of stability between 2005 and 2008, expenditure on subsidies in 2009 and 2010 rose under the effect of anti-crisis measures, and was up by 0.5 p.p. of GDP in the period of SDS implementation (2005-2010). The share of intermediate consumption decreased in 2005-2007, but afterwards rose gradually. Relative expenditure on capital transfers (2005: 1.0%; 2010: 0.9% of GDP) was higher in 2008 and 2009 but decreased in 2010. Relative expenditure on interest payments (2005: 1.6%; 2010: 1.6% of GDP) narrowed until 2008 but has since been rising again due to increased borrowing. Relative general government expenditure in Slovenia in 2009 was at a lower level than in the EU on average, yet rose faster than across the EU amid a larger decline in GDP. In 2009 (the latest available data), total general government expenditure1 relative to GDP in Slovenia was 49.0% (EU average: 50.8%). Compared with 2008, the share went up by 4.9 p.p. of GDP in Slovenia and by 3.9 p.p. of GDP on average in the EU. An increase was recorded in all Member States (except Malta), accounting for over 3% of GDP and in some countries even more than 6% of GDP (Denmark, Finland, Ireland, Lithuania and Slovakia). This rise was a result of higher expenditure intended to solve the economic crisis and of lower GDP. In the structure of general government expenditure, Slovenia allocated over 3.2 p.p. more to capital transfers and gross capital formation than the EU average, 2.2 p.p. more on subsidies, and 3.4 p.p. more on compensation of employees. It spent less than the EU average on social benefits in cash and kind (4.5 p.p.), and interest payments (2.2 p.p.), and almost the same share on intermediate consumption. 1 Slovenia's general government expenditure according to ESA-95 includes four general government budgets (state and local budgets, and the pension and health funds), public funds (including the Pension Fund (KAD) and the Slovenian Restitution Fund (SOD)), public institutes and public agencies. Table: Breakdown of general government expenditure as % of GDP in 2000-2010 2000 2005 2006 2007 2008 2009 2010 Total general government expenditure 46.7 45.2 44.5 42.5 44.2 49.0 49.0 Intermediate consumption 6.6 6.2 6.2 5.6 6.0 6.5 6.5 Compensation of employees 11.3 11.5 11.2 10.5 11.0 12.4 12.4 Other taxes on production, expenditure 0.5 0.5 0.4 0.3 0.2 0.0 0.0 Social benefits and benefits in cash and kind 18.0 17.7 17.3 16.3 16.6 18.7 19.1 Other current transfers, expenditure 1.3 2.1 2.0 1.6 1.9 2.2 2.1 Subsidies, expenditure 1.9 1.6 1.6 1.6 1.6 1.8 2.1 Property income, payable 2.4 1.6 1.4 1.3 1.1 1.3 1.6 Capital transfers 1.6 1.0 0.8 0.9 1.2 1.2 0.9 Gross capital formation 3.2 3.2 3.7 4.3 4.5 4.6 4.3 Total general government revenue 43.0 43.8 43.2 42.4 42.3 43.1 43.5 Source: SORS, Main Aggregates of the General Government Sector, Slovenia 2007-2010, 31 March 2011, Non-financial sector: S 13 general government, calculations by IMAD (2000 and 2005). Figure: General government expenditure as % of GDP in EU Member States, in 2000 and 2009 70 60 50 40 30 20 10 0 2000 12009 !5 C £ !5 C •O (D LL g Source: Eurostat Portal Page — Government Finance Statistics, 2011. Economic structure of taxes and contributions The overall burden of taxes and contributions measured as a share of GDP, which in Slovenia is below the EU average, increased in 2009 following a considerable fall in GDP. The tax burden in Slovenia in 2009 was 38% of GDP, which was, following a significant fall in GDP, 0.4 p.p. of GDP higher than in 2008 and 0.3 p.p. higher than in 2000. Slovenia ranks in the middle of EU countries (EU average: 39.4% of GDP).1 The overall tax burden in Slovenia increased in 2000-2005, fell in 20062008, but rose again in 2009 given the large fall in GDP. This increase was mainly due to a higher share of social-security contributions (by 0.9 p.p. of GDP). The share of taxes decreased by 0.5 p.p. of GDP, mostly in taxes on income and property, more precisely, corporate income tax. Taxes on production and imports stood at the 2008 level (14.4% of GDP), despite a higher share of excise duties and a lower share of other taxes on production as a result of the abolition of payroll tax. In terms of tax structure, in 2000-2008Slovenia and the EU on average increased the otherwise low tax burden on capital while the burden on labour and consumption was lower. Thanks to the tax reform, the overall burden of taxes and contributions in Slovenia was down by 0.6 p.p. of GDP in 2007 and by a further 0.4 p.p. of GDP in 2008. Tax reform, in particular of personal income tax and corporate income tax, the gradual phasing out of the payroll tax, as well as changes in excise duties, resulted in a higher share of taxes on capital and a lower share of taxes on labour and consumption. A structural analysis of tax systems2 reveals that, compared with the EU average, in 2008 Slovenia had a higher tax burden on labour and a lower tax burden on capital. The share of taxes on consumption in total taxes and contributions in Slovenia was 35.7% and slightly exceeded the EU average (33.1%), whereas the share of taxes on labour was considerably above the EU average (Slovenia: 51.7%; EU: 46.7%). The share of taxes on capital was low; in 2007, it rose slightly as a consequence of rising corporate income tax and favourable capital income, but fell to 12.7% in 2008 (EU: 20.4%). Calculations and comparisons of implicit tax rates3 also confirm that the tax burden on labour was above average in Slovenia in 2008. The implicit tax rate on consumption for Slovenia stood at 23.9%, whereas the EU average was 21.5%. Seven Member States reported higher rates. After 2003, this rate dropped in Slovenia, while the average for European countries rose. The calculated implicit tax rate on labour in Slovenia totalled 35.7% and was higher than the EU average (34.2%) on account of relatively high social-security contributions. Ten Member States reported higher rates than Slovenia. In 2000-2006, this rate was quite stable in Slovenia but began to fall in 2007 as a result of the tax reform. The average rate for European countries was already decreasing before 2005 and became stable after that. The implicit tax rate on capital for Slovenia is estimated at 21.6% and is below the EU-254 average (26.5%). The implicit tax rate showed an upward trend both in Slovenia and in EU countries in 2007, but declined in 2008. 1 Given the differences in tax systems, the difference between the country with the highest tax burden (Denmark: 48.9% of GDP) and the country with the lowest tax burden (Latvia: 26.7% of GDP) is very large (22.2 p.p. of GDP). 2 The tax classification is based on the classification of taxes according to ESA-95 and common rules for classification. Taxes on consumption are defined as taxes on transactions between consumers and producers, and as taxes on final consumption of goods. Taxes on labour are directly linked to wages and paid by employees or employers. Taxes on capital refer to taxes on capital, corporate income, income from household capital (annuities, dividends, interests, other income from property), capital gains, on property, etc. 3 The implicit tax rate on consumption is defined as the ratio between taxes on consumption and final household consumption in a country's territory in compliance with the national accounts methodology, while the implicit tax rate on labour is defined as the ratio between taxes on labour and the compensation of employees increased by payroll tax, in compliance with the national accounts methodology. 4 No data for EU-27. Table: Economic structure of taxes and social security contributions, as % of GDP Total Taxes on consumption Taxes on labour Taxes on capital 2000 2008 2000 2008 2000 2008 2000 2008 EU-27 40.6 39.3 11.4 10.8 20.3 19.7 8.9 9.0 Austria 43.2 42.8 12.4 11.7 24.0 23.9 6.9 7.3 Belgium 45.0 44.3 11.3 10.7 24.2 23.6 9.5 10.0 Bulgaria 32.5 33.3 14.4 18.0 14.0 10.2 4.6 5.4 Cyprus 30.0 39.2 10.6 15.9 9.4 11.1 9.9 12.2 Czech Rep. 33.8 36.1 10.6 10.8 17.1 18.8 6.2 6.6 Denmark 49.4 48.2 15.7 15.5 26.6 25.7 7.2 7.1 Estonia 31.0 32.2 11.7 11.8 17.5 17.7 1.8 2.6 Finland 47.2 43.1 13.6 12.9 23.7 23.0 9.9 7.3 France 44.1 42.8 11.6 10.7 23.0 22.6 9.9 9.8 Greece 34.6 32.6 12.4 11.3 12.4 14.0 9.8 7.3 Ireland 31.6 29.3 12.1 10.7 11.5 11.2 8.0 7.4 Italy 41.8 42.8 10.9 9.8 19.9 21.6 10.9 11.4 Latvia 29.5 28.9 11.3 10.5 15.3 14.4 2.9 4.0 Lithuania 30.1 30.3 11.8 11.4 16.3 14.9 2.3 4.0 Luxembourg 39.1 35.6 10.7 10.0 15.3 15.4 13.1 10.2 Hungary 39.0 40.4 15.5 14.5 19.0 20.8 4.5 5.1 Malta 28.2 34.5 12.1 13.9 9.7 9.6 6.3 11.0 Germany 41.9 39.3 10.5 10.6 24.5 21.8 6.8 6.9 Netherland 39.9 39.1 11.7 12.0 20.4 20.3 7.8 6.8 Poland 32.6 34.3 11.3 12.9 14.2 13.1 7.2 8.5 Portugal 34.3 36.7 12.2 12.7 14.1 15.9 8.0 8.1 Romania 30.2 28.0 11.5 11.2 13.2 11.6 5.5 5.2 Slovakia 34.1 29.1 12.2 10.3 15.0 12.3 6.9 6.5 Slovenia 37.5 37.3 13.9 13.3 20.7 19.3 3.0 4.8 Spain 33.9 33.1 9.9 8.4 15.9 16.7 8.7 8.6 Sweden 51.8 47.1 12.4 12.9 31.0 28.5 8.3 5.7 U.K. 36.7 37.3 11.8 10.5 14.0 14.1 10.9 12.6 Source: Taxation trends in the European Union (Eurostat, European Commission), 2010. Figure: Implicit tax rate on consumption, labour and capital (as % of the base), 1995-2008 30 28 26 24 22 X IS 20 18 JE 16 14 12 10 -..................•..................' i - : ■ I 39.0 38.5 38.0 37.5 37.0 36.5 36.0 35.5 35.0 34.5 34.0 £ 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Taxation trends in the European Union (Eurostat, European Commission), 2010. ■ SLO consumption (left axis) - EU-27 consumption (left axis) SLO capital (left axis) EU-25 capital (left axis) SLO labour (right axis) - EU-27 labour (right axis) Subsidies In 2009, general government subsidies increased by 12.4% in nominal terms mainly due to the stimulus measures taken to offset the economic crisis, and in relative terms by 0.3 p.p. of GDP due to the decline in GDP. After remaining unchanged for several years, the share of subsidies in GDP (1.6% of GDP) increased to 1.9% of GDP in 2009 as a result of an increase in subsidies and a concurrent decline in GDP. According to the most recent internationally comparable data for 2008, subsidies were much higher in Slovenia than the EU average (1.1% of GDP), and were fairly stable in the 2005-2008 period both in Slovenia and in the EU. In 2008, only six EU countries had a higher level of subsidies than Slovenia. Interestingly, the highest subsidies were recorded for three developed countries (Austria, 3.5%, Belgium and Denmark, 2.1% of GDP) and three less developed countries (Malta, 2.1%, and the Czech Republic and Slovakia, 1.7%). The classification of subsidies by function shows that Slovenia allocates the bulk of subsidies for economic affairs, with subsidies for agriculture and transport accounting for the greatest shares. Subsidies for economic affairs are highest in Slovenia (Table 1). Their structural share had been diminishing in the period until 2008 on account of faster growth in subsidies for other functions (2006: 79%; 2008: 74%), but it increased once again in 2009 (to 78%). Expenditure on subsidies had accounted for 24.5% (2008) to 31.3% (2006) of total general government expenditure on economic affairs in 2005-2008, and its share increased to 29.4% in 2009. The data on subsidies for economic affairs at the second level indicate that until 2008, the bulk of subsidies were allocated for agriculture and transport, while in 2009, subsidies for employment expanded significantly to cushion the impact of the economic crisis. After representing around 30% of all subsidies for economic affairs in 2005-2008, subsidies for agriculture plummeted to 20.1% in 2009. Subsidies for transport had accounted for an even higher share (around 50%), but they also shrank in 2009 in both absolute and relative terms (to 44%). In response to the economic crisis, the relatively low subsidies for general economic, commercial and labour affairs surged in 2009 (2008: 11.1%; 2009: 32.2%) due to measures targeted at preserving jobs. In this context, it should be noted that subsidies for economic affairs do not include subsidies for R&D. Table 1: Subsidies by functional classification in Slovenia in the period 2000-2008, in EUR m 2000 2005 2006 2007 2008 2009 TOTAL 349.9 452.1 503.1 549.7 587.2 660.3 1. General public services 16.6 7.1 7.9 14 11 9.2 2. Defence 0 1.6 4.1 8.0 9.8 4.7 3. Public order and safety 0 1.3 0.3 0.9 1.1 1.7 4. Economic affairs 287.4 327.8 396.8 405.0 432.9 514.6 4.1 General economic affairs 57.3 63.1 62.2 104.1 49.1 165.7 4.2 Agriculture, forestry, fisheries 91.3 101.2 120.0 112.3 143.6 103.6 4.3 Energy 0.2 0.3 1.0 0.9 1.3 4.9 4.4 Mining, manufacturing, construction 10.6 1.3 2.8 2.6 0.7 1.0 4.5 Transport 125.4 159.4 207.0 180.9 231.1 227.9 4.6 Communications 0.4 0 0.2 0 2.6 1.4 4.7 Other activities 2.1 2.5 3.6 4.2 4.4 10.0 4.8 R&D in the economy 0.1 0 0 0 0 0 4.9 Other economic affairs 0 0 0 0 0 0 5. Environmental protection 29.4 51.6 44.1 46.8 49.1 36.9 6. Housing and community amenities 3.1 4.8 6.5 9.5 9.8 13.6 7. Health 0.1 0 0 2.8 0.2 0.2 8. Recreation, culture, activities of associations 3.5 8.4 9.3 12.0 12.9 9.3 9. Education 1.1 2.8 5.0 19.4 26.1 30.6 10. Social protection 8.7 46.6 29.2 31.3 34.3 39.5 Source: General government expenditure by function and type of expenditure (SORS). Table2: Subsidies paid by general government in EU Member States, 1995-2008, as % of GDP 1995 2000 2005 2006 2007 2008 EU-27 N/A N/A 1.1 1.1 1.1 1.1 EU-15 1.6 1.3 1.1 1.1 1.2 1.2 Austria 2.8 3.2 3.4 3.4 3.3 3.5 Belgium 1.2 1.2 1.6 1.7 1.9 2.1 Bulgaria N/A 1.0 0.8 0.7 0.7 0.7 Cyprus 0.9 1.4 0.7 0.5 0.4 0.4 Czech Rep. 2.9 2.8 1.8 1.9 1.8 1.7 Denmark 2.7 2.4 2.3 2.2 2.2 2.1 Estonia 0.8 1.1 0.7 0.9 0.9 1.0 Finland 2.7 1.5 1.3 1.4 1.3 1.3 France 1.6 1.5 1.4 1.4 1.4 1.4 Greece 0.4 0.1 0.1 0.1 0.1 0.1 Ireland 1.0 0.7 0.5 0.4 0.5 0.5 Italy 1.4 1.2 0.9 0.9 1.0 0.9 Latvia N/A 1.0 0.5 0.6 0.6 0.9 Lithuania N/A 0.8 0.7 0.7 0.9 0.7 Luxembourg 1.6 1.5 1.6 1.5 1.5 1.5 Hungary 2.2 1.6 1.4 1.4 1.4 1.1 Malta 1.7 1.4 2.1 2.1 2.0 2.1 Germany 2.1 1.7 1.2 1.2 1.1 1.1 Netherland 1.0 1.5 1.2 1.1 1.3 1.2 Poland N/A N/A 0.6 0.6 0.6 0.7 Portugal 1.2 1.2 1.5 1.4 1.1 1.1 Romania 3.4 1.8 1.5 1.8 1.4 1.1 Slovakia 4.7 2.5 1.3 1.3 1.2 1.7 Slovenia N/A 1.9 1.6 1.6 1.6 1.6 Spain 1.0 1.1 1.0 1.0 1.1 1.1 Sweden 3.6 1.5 1.5 1.5 1.4 1.5 U.K. 0.7 0.4 0.6 0.7 0.7 0.7 Source: Eurostat Portal Page - Government Finance Statistics, obtained on 6 January 2011. Note: N/A - not available. As the data for Estonia released on 6 January 2011 are incorrect, we used data from the previous release (22 December 2010). Figure: Subsidies, 2008, in % of GDP 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 CU -O S iE C (z (V (ü J? u 3 CO -a c JD ^ m -2 2 I (V I £ C (V Q oc £ .Ü2 State aid In 2009, state aid as a share of GDP increased significantly as a result of measures taken to mitigate the impact of the economic crisis. Compared with 2008, state aid increased by as much as 86.6% (0.86 p.p. of GDP) or EUR 280 m in 2009; compared with 2007, when it hit the lowest level after several years of decline, state aid was almost one p. p. of GDP or EUR 337 m higher. State aid as a share of GDP in 2009 was also much higher than in 2005. A comparison with 2000 is not realistic, as total state aid was taken into account in 2000, while since Slovenia's accession to the EU almost half of state aid to agriculture, i.e. measures under the Common Agricultural Policy (CAP), is no longer considered state aid. Slovenia attempted to mitigate the economic crisis by horizontal aid, which returned to the 2006 level in 2008 after a sizeable decline in 2007 and increased strongly in 2009. The increase in horizontal aid derives from Slovenia's attempts to address the economic crisis with a very large amount of state aid (0.6% of GDP) allocated under a special horizontal category referred to as »the aid to remedy a serious disturbance in the economy«, with a three-times increase in funds dedicated to R&D (relative to 2008) and a six-times larger amount for employment aid. Regional aid also increased somewhat in absolute and relative terms (relative to GDP). Among the other categories of horizontal aid, state aid for small and medium-sized enterprises and training recorded a decline in both the amount and structure, given that aid measures implemented under the »de minimis« rule for these functions are not considered state aid (Twelfth Survey on State Aid in Slovenia, 2011). Also without the aid to remedy a serious disturbance in the economy, the increase of horizontal aid as a share of total state aid (2008: 47.6%; 2009: 71.4%) meets the development objectives defined in Slovenia's Development Strategy and the Europe 2020 strategy and contributes to the general efficiency of state aid with regard to its impact on the development of individual recipients and, through spillover effects, on the society as a whole. The amount of state aid dedicated for special sectors and agriculture rose in absolute terms, but the share of this aid decreased (2008: 52.4; 2009: 28.5%), which was also due to the absolute and relative declines in state aid for agriculture and fisheries. State aid for transport increased, as it was for the first time also allocated for maritime traffic. A relatively large increase was also recorded in the otherwise small state aid for rescuing and restructuring enterprises in difficulties. aid for rail transport) in Slovenia reached 1.5% of GDP2 and lagged strongly behind the EU average (3.6% of GDP). This significant increase of state aid in the EU as a whole reflects large rises in response to the crisis in nine EU Member States (Belgium, Denmark, Germany, Ireland, Austria, Greece, Latvia, Sweden and the United Kingdom). Aid to remedy the financial crisis accounted for 3% of GDP in the EU and was intended for the financial sector (Report from the Commission, State Aid Scoreboard, 2010). The European Commission granted aid for the Slovenian financial sector in October 2008, but no aid measures were implemented before 2009 when only 0.01% of GDP was spent on state aid. Table V. Indicators of state aid in Slovenia, 2000-2009 2000 2005 2006 2007 2008 2009 State aid in EUR m, current prices 407,2 267,15 276,27 267,87 324,10 604,76 Share of state aid GDP (%) 2,07 0,95 0,91 0,77 0,87 1,73 Share of state aid in government expenditure (%) 4,68 2,18 2,09 1,92 2,10 3,69 State aid per employee (in EUR) 530,11 328,37 331,64 309,9 368,2 716 State aid per resident (in EUR) N/A 133,35 137,42 132,23 159,47 295,44 Source: for 2000: Third Survey on State Aid in Slovenia, 2001; for 2005: Tenth Survey on State Aid in Slovenia, 2008; for 2007-2009, Twelfth Survey on State Aid in Slovenia, 2011. Notes: for tolar/EUR conversion for 2000 and 2005, the average exchange rate of the Bank of Slovenia was used (1 euro = 205.0316 tolars); N/A - not available. State aid (excluding state aid for rail transport)1 increased significantly in Slovenia in 2009, but was still below the EU average. State aid (excluding state 1 The European Commission only publishes data on state aid in Member States excluding: (1) railway transport and (2) agriculture, fisheries and transport. 2 The estimate based on the national report indicates a somewhat higher level of state aid (1.62% of GDP) (Twelfth Survey on State Aid in Slovenia, 2011). Table 2: State aid excluding railway transport, as a % of GDP 1995 2000 2005 2006 2007 2008 2009 EU-27 1.0 0.7 0.6 0.8 0.5 2.5 3.6 EU-15 1.0 0.6 0.5 0.8 0.5 2.6 3.8 EU-12 N/A 1.2 1.1 0.9 0.9 1.1 1.1 Austria 1.1 0.7 0.5 0.8 0.5 0.9 4.1 Belgium 0.6 0.4 0.4 0.4 0.4 6.6 10.2 Bulgaria N/A N/A 0.1 0.1 1.4 1.2 2.1 Cyprus N/A 2.6 1.4 0.6 0.7 0.6 2.4 Czech Rep. N/A 2.4 0.6 0.8 0.8 1.0 0.7 Denmark 0.6 1.0 0.8 0.7 0.8 24.9 4.6 Estonia N/A 0.1 0.3 0.3 0.2 0.3 0.3 Finland 2.8 1.4 1.3 1.3 1.2 1.1 1.2 France 0.8 0.6 0.6 1.7 0.5 2.0 2.2 Greece 1.4 0.6 0.4 0.4 0.4 0.6 6.0 Ireland 0.7 1.1 0.5 0.5 0.7 1.2 7.7 Italy 1.2 0.5 0.4 0.4 0.4 0.4 0.7 Latvia N/A 0.6 1.1 1.3 1.0 5.0 5.8 Lithuania N/A 0.3 0.5 0.5 0.6 0.8 0.8 Luxembourg 0.5 0.3 0.3 0.2 0.2 7.3 2.8 Hungary N/A 1.1 3.2 2.2 1.9 2.3 2.1 Malta N/A 3.4 3.6 2.8 2.4 2.0 2.0 Germany 1.4 0.8 0.8 0.8 0.6 2.7 4.8 Netherland 0.4 0.5 0.4 0.4 0.4 2.7 2.1 Poland N/A 1.0 0.8 0.8 0.6 0.9 0.9 Portugal 0.9 0.8 0.9 0.9 1.3 1.2 1.0 Romania N/A N/A 0.6 0.7 1.2 0.6 0.7 Slovakia N/A 0.4 0.6 0.5 0.4 1.1 0.5 Slovenia N/A 1.0 0.7 0.7 0.6 0.7 1.5 Spain 1.0 0.9 0.5 0.5 0.5 0.6 1.3 Sweden 0.4 0.4 1.0 1.0 0.9 1.0 3.8 U.K. 0.4 0.2 0.2 0.2 0.3 4.0 7.9 Source: State Aid Scoreboard, Autumn 2010, (European Commission), 2010; for 2005 and 2007, data for Slovenia: I Note: N/A - not available. Figure: State aid excluding railway transport, 2009, as % of GDP 12 10 8 ^ 6 4 2 0 Source: State Aid Scoreboard, Autumn 2010, (European Commission), 2010. THE FOURTH PRIORITY: A modern welfare state Employment rate Unemployment rate Long-term unemployment rate Temporary employment Part-time employment Social-protection expenditure Expenditure on health Expenditure on long-term care Human development index Minimum wage Risk of poverty and material deprivation of the population Healthcare resources Life satisfaction Employment rate The employment rate1 declined in 2010 for the second year in a row but remains above the EU average. It was at 66.5% in the second quarter of 2010, 1.1% p.p. lower than in the second quarter of 2009. Until 2003, the employment rate had hovered around 63%, slightly above the EU average. It was increasing in 2004-2008, but has dropped by around 2 p.p. since. The female employment rate has always been higher than the EU average (63.7%2 in the second quarter of 2010, having declined by just over 1 p.p. since 2008), while the male employment rate has only caught up with the EU average in the last three years (69.1% in the second quarter of 2010, having declined by nearly 4 p.p. since 2008). Particularly the employment rates of young people aged 15-24 and people aged 25-54 declined in 2009 and 2010, while the employment rate of those aged 55-54 is steadily increasing. The employment rate of the young (39.2% in the second quarter of 2010) is hovering around the EU average largely due to high informal employment in this population group (work through student job agencies), but formal employment of the young population according to the Statistical Register of Employment (SRE) is low (see Figure). The employment rate in the age group of 55-64 (37.1% in the second quarter of 2010) remains below the EU average. recorded a somewhat smaller decline (1.5%5). In 2010, employment declined in most market activities, most notably in manufacturing (by 11,250 persons or 5.6%) and construction (by 8,230 persons or 9.5%). It rose only in information, professional, scientific and technical and other business services, and in education, health and social work. With the decline in employment in the construction sector, the number of foreigners working in Slovenia also continued to fall (by 5,000 or 7.8%, on average, relative to the previous year). In 2010, the fall in employment was also mitigated by emergency measures in the labour market, but fewer employers applied for subsidy schemes than a year earlier. To cushion the consequences of the economic crisis on the labour market, the government adopted two emergency acts6 in 2009, which included over 35,000 employees per month, on average, in subsidy schemes in 2009 (4.3% of the total number of persons in employment) and around 9,000 per month, on average, in 2010, and thus prevented even faster growth in unemployment. Approximately 16,000 unemployed persons, up 19% over the previous year, thus landed work under active employment-policy programmes in the areas of employment, self-employment and public works. Also in 2010, the employment rate mainly dropped due to the contraction of formal employment, which was most pronounced in manufacturing and construction. The number of formally employed persons according to SRE3 declined by an average of 23,132 or 2.7% in 2010 (0.3 p.p. more than in 2009), and by 25,680 from December 2009 to December 2010. The number of employees declined by 2.6% in 2010. The number of farmers also dropped (by 13.2%4), while the number of other self-employed persons rose by 2.2% (after declining in the first half of 2010, it started to increase again in the second, also due to a stronger implementation of active employment-policy measures in the area of self-employment). With informal employment increasing slightly, the number of employed persons according to the survey 1 In the age group of 15-64 years. 2 In the third quarter of 2010, the employment rate was still 0.2 p.p. lower, i.e. 66.3%, even though it usually increases for seasonal reasons in that period of the year. 3 The number of employees and self-employed persons according to the statistical register of employment plus monthly SORS estimates on the number of individual farmers. 4 SORS estimates the number of self-employed farmers based on data from the Labour Force Survey for the previous quarter. The number of formally employed persons in agriculture thus oscillates every three months. It is thus estimated to have declined by 5,781 (17.9%) between December 2009 and January 2010, and increased again by 2,718 or 10.3% between March and April 2010. Such strong fluctuations can hardly be interpreted otherwise than as a statistical error. 5 IMAD calculations based on quarterly data by SORS. The decline in employment according to the labour-force survey was smaller than the decline in formal employment, in part because the survey does not include the number of temporarily employed foreigners, which shrank by one fifth in 2010 according to IMAD estimates. 6 The Partial Subsidising of Full-Time Work Act, OG RS 5/2009, and the Partial Reimbursement of Payment Compensation Act, OG RS 42/2009. Table: Employment rates (15-64 age group) according to the labour-force survey, Slovenia and the EU, 1995-2009, in % 1995 2000 2005 2006 2007 2008 2009 2010(Q2) EU N/A 62.2 63.5 64.5 65.4 65.9 64.6 64.3 Austria 68.8 68.5 68.6 70.2 71.4 72.1 71.6 71.4 Belgium 56.1 60.5 61.1 61.0 62.0 62.4 61.6 61.5 Bulgaria N/A 50.4 55.8 58.6 61.7 64.0 62.6 60.2 Cyprus N/A 65.7 68.5 69.6 71.0 70.9 69.9 69.8 Czech Rep. N/A 65.0 64.8 65.3 66.1 66.6 65.4 64.9 Denmark 73.4 76.3 75.9 77.4 77.1 78.1 75.7 74.1 Estonia N/A 60.4 64.4 68.1 69.4 69.8 63.5 59.5 Finland 61.6 67.2 68.4 69.3 70.3 71.1 68.7 69.2 France 59.5 62.1 63.7 63.7 64.3 64.9 64.2 64.2 Greece 54.7 56.5 60.1 61.0 61.4 61.9 61.2 60.1 Ireland 54.4 65.2 67.6 68.7 69.2 67.6 61.8 60.4 Italy 51 53.7 57.6 58.4 58.7 58.7 57.5 57.2 Latvia N/A 57.5 63.3 66.3 68.3 68.6 60.9 58.9 Lithuania N/A 59.1 62.6 63.6 64.9 64.3 60.1 56.7 Luxembourg 58.7 62.7 63.6 63.6 64.2 63.4 65.2 64.6 Hungary N/A 56.3 56.9 57.3 57.3 56.7 55.4 55.3 Malta N/A 54.2 53.9 53.6 54.6 55.3 54.9 55.9 Germany 64.6 65.6 66.0 67.5 69.4 70.7 70.9 71.0 Netherland 64.7 72.9 73.2 74.3 76.0 77.2 77.0 76.3 Poland N/A 55.0 52.8 54.5 57.0 59.2 59.3 59.3 Portugal 63.7 68.4 67.5 67.9 67.8 68.2 66.3 65.7 Romania N/A 63.0 57.6 58.8 58.8 59.0 58.6 60.1 Slovakia N/A 56.8 57.7 59.4 60.7 62.3 60.2 58.6 Slovenia N/A 62.8 66.0 66.6 67.8 68.6 67.5 66.5 Spain 46.9 56.3 63.3 64.8 65.6 64.3 59.8 58.6 Sweden 70.9 73.0 72.5 73.1 74.2 74.3 72.2 72.9 U.K. 68.5 71.2 71.7 71.6 71.5 71.5 69.9 69.3 Source: Eurostat Portal Page - Population and Social Conditions - Labour Market, 2010. Note: N/A - not available. Figure: Employment rate by age, Slovenia and EU-27, 2009 ■ Slovenija: LFS ■ EU-27: LFS 100 90 80 70 60 J? .!= 50 40 30 20 10 0 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 years years years years years years years years years Source: Eurostat Portal Page - Population and Social Conditions - Labour Market, 2010. Note: ADS: LFS - Labour Force Survey; SRE: Statistical Register of Employment (including formally employed and self-employed persons). 60-64 years 65 years + Unemployment rate In 2010, the survey and registered unemployment rates continued to increase as a result of the economic crisis, but the internationally comparable survey unemployment rate remained below the EU average. From the third quarter of 2008, when it reached the lowest level since measurements began (4.1%), the survey unemployment rate increased to 7.8% by the fourth quarter of 2010. The average annual survey unemployment rate in 2010 was 7.2%,1 a 1.4 p.p. increase over 2009. Despite this growth, according to the available data,2 the survey unemployment rate remained lower than, on average, in the EU and in the euro area. The registered unemployment rate has also been rising since September 2008, when it fell to the lowest level since 1990, 6.3%. By the end of 2009, it was already 10.3%, reaching 11.8% at the end of 2010. For 2010 as a whole, it stood at 10.7%. (7.8% fewer than in 2009). People who had lost fixed-term employment still prevailed (48.9% of all who lost their jobs). The number of persons that had become unemployed because of bankruptcies, expiry of fixed-term employment and for business reasons declined, but many more persons lost work due to the winding up of businesses. On the other hand, 57,004 unemployed persons landed work in 2010 (17.4% more than in 2009), 16.6% through active employment-policy programmes (programmes of employment, self-employment and public works). Owing to the lack of new jobs, the number of long-term unemployed persons also grew in 2010 (by 35.8%). The number of all registered first-time job-seekers also increased (by 17.9%), while the number of newly registered first-time job-seekers fell (by 1.2%). There was a further increase (by 22.8%) in 2010 in the number of unemployed persons according to the Labour Force Survey, to 76,000.3 The unemployment rates of young people and persons with lower levels of education increased the most during the crisis in 2009 and 2010; the unemployment rate of women remains lower than that for of men. The survey unemployment rate of young people, which fell to the lowest level since measurements began in the second quarter of 2007 (9.3%), is again on an upward trend. It averaged 10.4% in 2008, 13.6% in 2009 and 15.8% in the second quarter (but was nevertheless still far below the EU average - 20.6%). Above-average growth was also recorded for the survey unemployment rates of persons with lower and secondary education levels: the former had dropped to 6.2%, on average, by 2008, but reached 11.7% again in the second quarter of 2010; the latter rose to 6.3% in 2009 from 4.4% in 2008 as a whole, reaching 7.3% in the second quarter of 2010. The survey unemployment rate for persons with tertiary education, which is on a slow, though steady upward trend, also increased again in 2010 (to 4.1%). The survey unemployment rate for women, which had fluctuated around 7% in 2001-2006, dropped to 4.4% by the third quarter of 2008. Since then, it has been increasing, but at a slower pace than the unemployment rate of men. It was 7.2% in 2010 as a whole, while the survey unemployment rate for men was 7.3%. December 2010 saw the highest number of registered unemployed persons since March 2000 (110,021), but in 2010 as a whole, the average number of unemployed persons increased less year-on-year than in 2009. A total of 110,021 persons were registered as unemployed at the end of December 2010, 13,349 (13.8%) more than in December 2009. On average, 100,504 persons were unemployed in 2010, 14,151 (16.4%) more than in 2009 (when the number of unemployed persons increased by 36.6%). Overall, 83,466 persons lost work in 2010 1 IMAD calculations based on the quarterly data by SORS. 2 For the third quarter of 2010. 3 IMAD calculations based on quarterly data by SORS. Table: Survey unemployment rates in Slovenia and EU Member States in 1995-2010, % 1995 2000 2005 2006 2007 2008 2009 2010 EU N/A 8.7 8.9 8.2 7.2 7.0 8.9 N/A Austria 3.9 3.6 5.2 4.8 4.4 3.8 4.8 4.4 Belgium 9.7 6.9 8.5 8.3 7.5 7.0 7.9 8.4 Bulgaria N/A 16.4 10.1 9.0 6.9 5.6 6.8 9.9 Cyprus N/A 4.9 5.3 4.6 4.0 3.6 5.3 6.8 Czech Rep. N/A 8.7 7.9 7.2 5.3 4.4 6.7 N/A Denmark 6.7 4.3 4.8 3.9 3.8 3.3 6.0 7.4 Estonia N/A 13.6 7.9 5.9 4.7 5.5 13.8 16.9 Finland 15.4 9.8 8.4 7.7 6.9 6.4 8.2 8.4 France 11 9.0 9.3 9.2 8.4 7.8 9.5 9.7 Greece N/A 11.2 9.9 8.9 8.3 7.7 9.5 N/A Ireland 12.3 4.2 4.4 4.5 4.6 6.3 11.9 13.5 Italy 11.2 10.1 7.7 6.8 6.1 6.7 7.8 N/A Latvia N/A 13.7 8.9 6.8 6.0 7.5 17.1 N/A Lithuania N/A 16.4 8.3 5.6 4.3 5.8 13.7 N/A Luxembourg 2.9 2.2 4.6 4.6 4.2 4.9 5.1 4.7 Hungary N/A 6.4 7.2 7.5 7.4 7.8 10.0 11.2 Malta N/A 6.7 7.2 7.1 6.4 5.9 7.0 6.7 Germany 8 7.5 10.7 9.8 8.4 7.3 7.5 6.8 Netherland 6.6 3.1 5.3 4.4 3.6 3.1 3.7 4.5 Poland N/A 16.1 17.8 13.9 9.6 7.1 8.2 9.6 Portugal 7.2 4.0 7.7 7.8 8.1 7.7 9.6 11.0 Romania N/A 7.3 7.2 7.3 6.4 5.8 6.9 N/A Slovakia N/A 18.8 16.3 13.4 11.1 9.5 12.0 14.5 Slovenia N/A 6.7 6.5 6.0 4.9 4.4 5.9 7.2 Spain 18.4 11.1 9.2 8.5 8.3 11.3 18.0 20.1 Sweden 8.8 5.6 7.6 7.0 6.1 6.2 8.3 8.4 U.K. 8.5 5.4 4.8 5.4 5.3 5.6 7.6 7.8 Source: Eurostat Portal Page - Population and Social Conditions - Labour Market, 2010. Note: N/A - not available. Figure: Selected specific survey unemployment rates, Slovenia, 2000-2010 ----Low education ---------Secondary education -----Tertiary education -Young people 18 16 14 12 ^ 10 JZ 8 6 4 2 0 2000 2001 2002 2003 2004 Source: Eurostat Portal Page - Population and Social Conditions - Labour Market, 2010. 2005 2006 2007 2008 2009 Q22010 Long-term unemployment rate The long-term unemployment rate,1 an indicator of social cohesion and labour-market problems, increased significantly in 2010. After a long period of decline (2000-2009), the long-term unemployment rate nearly doubled year-on-year in the second quarter of 2010, increasing to 3.2% (up 1.5 p.p. from 2009). The female long-term unemployment rate was 3.0% (1.3 p.p. more than a year earlier), while the male long-term unemployment rate was 3.3% (1.7 p.p. more than a year earlier). In the second quarter of 2010, the long-term unemployment rate for women was lower than that for men for the first time during the implementation of SDS (2005-2010) (see Figure). In great part, this was a result of the higher inflow of men (with lower education) into unemployment compared with the inflow of women, but also a lower level of male participation2 in active employment-policy programmes in 2009. Although the long-term unemployment rate rose more in Slovenia than in the EU as a whole, it is still lower than in the EU. Slovenia's long-term unemployment rate has been below the EU average since 2005. Although the rate increased more in Slovenia than in the EU over the last year, it was still lower in the second quarter of 2010 than for the EU, where it averaged 3.8%, 1 p.p. more than in the same period of 2009. The long-term unemployment rate in the EU as a whole also increased more for men (1.2 p.p.) than for women (0.6 p.p.) over the last year, as in Slovenia. The share of long-term unemployed people in total unemployment increased over the last year and returned to the pre-crisis level. After contracting significantly in 2009 due to a high inflow of the newly unemployed, the share of long-term unemployed people in Slovenia rose once more, reaching 44.6% in the second quarter of 2010, an increase of 14 p.p. over the second quarter of 2009. In the second quarter of 2010, the share of long-term unemployed persons in total unemployment was again above the EU average (38.5%). Last year's significant increases in the share and number of the long-term unemployed indicate an urgent need for strengthening active employment-policy programmes, which reduce and prevent long-term employment. 1 The long-term unemployment rate is the ratio of the long-term number of unemployed (people unemployed for over a year) to the total size of the labour force. 2 The rate of participation in active employment policy programmes (measured as a share of unemployed persons participating in active employment-policy programmes) for men was 54.4% in 2009, and for women, 65.2%. Table: Long-term unemployment rates in 2000-2010,1 EU countries 2000 2005 2006 2007 2008 2009 2010 EU-27 4.0 N/A 3.8 3.1 2.6 2.8 3.8 Austria N/A 1.2 1.3 1.2 0.8 0.9 1.2 Belgium 3.6 4.2 4.6 3.8 3.3 3.5 4.1 Bulgaria 9.6 6.0 4.8 3.9 2.9 2.8 4.3 Cyprus 1.2 1.3 0.9 0.7 0.4 0.4 1.2 Czech Rep. 4.3 4.1 4.0 2.9 2.2 1.8 3.0 Denmark 0.8 1.2 0.8 0.7 0.5 0.4 1.3 Estonia 6.2 4.3 2.8 2.4 1.4 3.2 8.5 Finland 2.7 2.2 1.9 1.6 1.1 1.2 1.9 France N/A 3.8 4.0 3.4 3.0 3.2 3.8 Greece 6.3 5.2 4.9 4.1 3.6 3.7 5.4 Ireland 1.7 1.6 1.6 1.4 1.7 2.9 6.4 Italy 6.4 3.9 3.5 2.8 3.2 3.3 4.1 Latvia 8.1 4.3 2.6 1.7 1.7 4.0 8.1 Lithuania 8.1 4.6 2.6 1.5 0.8 2.8 7.4 Luxembourg 0.5 1.2 1.3 1.3 1.8 1.3 1.5 Hungary 3.1 3.2 3.4 3.5 3.6 3.9 5.5 Malta 4.0 3.3 2.9 2.3 2.3 3.2 2.9 Germany 3.8 5.8 5.5 4.7 4.0 3.4 3.3 Netherland N/A 2.2 2.0 1.5 1.1 0.9 1.3 Poland 7.3 10.5 8.1 5.1 2.5 2.3 2.9 Portugal 1.7 3.6 3.8 3.8 3.6 4.0 5.7 Romania 3.5 4.0 4.0 3.3 2.3 2.3 2.4 Slovakia 10.4 11.7 10.5 8.4 7.3 5.9 9.1 Slovenia 4.3 3.0 3.1 2.2 1.9 1.7 3.2 Sweden 1.4 N/A 1.1 0.9 0.7 1.0 1.5 Spain 4.7 2.3 1.9 1.7 1.8 3.8 7.2 U.K. 1.5 1.0 1.2 1.3 1.3 1.7 2.6 Source: Eurostat Portal Page - Labour Market - Employment and Unemployment, 2010. Note: 1 Data refer to the second quarter of the year; N/A - not available. Figure: Long-term unemployment rate by gender, Slovenia, 2000-20101 5 0 2000 2001 2002 2003 2004 2005 Source: Eurostat Portal Page - Labour Market - Employment and Unemployment, 2010. Note: 1Data refer to the second quarter of the year. ■ Women ■ Men 2006 2007 2008 2009 2010 4 3 2 Temporary employment Temporary employment is an important component of labour-market flexibility. The use of temporary employment enables employers to adjust to changes in the structure and volume of demand. In times of the economic crisis, non-extension of fixed-term employment contracts tends to be one of the ways in which employers reduce the number of employees, and this was reflected in a decreased prevalence of temporary employment in 2008 and 2009. The frequency of use of temporary employment is also related to the rigidity of employment-protection regulation, the seasonal nature of production and uncertainty about future demand. With persistent uncertainty about demand in the period of slow economic recovery, the prevalence of temporary employment is likely to increase. y-o-y level in the area of student work. In the age group 15-24 years, 80% of all employed women were on temporary employment contracts in the second quarter of 2010, 5.8 p.p. more than in the second quarter of 2009. The share of men on temporary employment contracts in the same age group was 57.7% in the second quarter of 2010, which is 0.9 p.p. less than in the second quarter of 2009. The share of temporary employment in total employment in Slovenia increased once more in 2010, after decreasing for two years. The share of temporary employment diminished1 in 2008 and 2009 amid the slowdown and decline in economic activity, but rose to 17.7% in 2010 (by 1.3 p.p. relative to the second quarter of 2009). The increase in the share of temporary employment in the second quarter of 2010 is related to greater caution by employers during the gradual economic recovery, and to relatively tight employment-protection regulation.2 The share of women on temporary employment contracts in the total number of employed women increased more than the corresponding share of men. The share of temporarily employed women in the total number of employed women (age group 15-64 years) totalled 19.9% in the second quarter of 2010, increasing by 2.3 p.p. The corresponding share of men amounted to 15.7% in the same period, 0.3 p.p. more than in the second quarter of 2009. The prevalence of temporary employment is typically highest among the young (particularly women) and in 2010, the share of young people in this type of employment continued to increase. Slovenia faced strong age segmentation on the labour market once more in 2010. The increase in the share of young people on temporary employment contracts was mainly due to a significant drop in the total employment of young people,3 which remained practically unchanged at the 1 In times of economic crisis, employers tend to decrease the number of workers by non-extension of fixed-term contracts and by reducing student work. 2 The latest amendment in the Employment Act in the area of severance pay and the notice period was adopted in 2007, but changes towards reducing rigidity were relatively small. 3 The number of employed young people in the age group 15-24 years declined by 29.6% in the second quarter of 2010 relative to the same period of 2009. Table: Share of temporary employment in total employment in age group 15-64 years, in % 2000 2005 2006 2007 2008 2009 2010 EU-27 N/A 13.9 14.4 14.5 14.1 13.4 14.0 Austria 8.6 8.8 8.7 8.8 8.7 8.6 8.9 Belgium 9.0 9.1 8.8 8.8 7.7 8.2 7.5 Bulgaria N/A 6.3 6.2 5.7 5.1 5.2 4.8 Cyprus 10.7 13.9 13.9 12.9 14.4 14.2 14.5 Czech Rep. 7.2 8.0 8.1 7.9 7.4 7.4 8.2 Denmark 10.2 9.9 9.6 9.0 8.5 9.1 8.6 Estonia 2.3 3.3 3.3 2.3 1.8 2.3 4.2 Finland 17.7 18.1 18.0 17.3 16.9 15.9 16.8 France N/A 14.3 14.4 14.4 14.3 13.6 15.3 Greece 13.8 12.1 10.9 11.2 11.6 12.2 12.8 Ireland 5.3 2.5 7.5 9.2 8.0 8.1 9.2 Italy 10.1 12.4 13.0 13.4 13.9 12.8 12.9 Latvia 6.7 8.4 7.1 5.3 2.8 3.7 6.7 Lithuania 3.8 5.1 4.7 3.7 2.7 2.7 2.6 Luxembourg 3.4 5.3 6.1 6.9 7.7 7.4 6.6 Hungary 6.8 7.2 6.7 7.5 7.8 8.2 9.7 Malta 3.9 4.0 3.8 5.5 4.1 4.8 4.9 Germany 12.8 13.8 14.2 14.3 14.7 14.3 14.6 Netherland 13.8 15.1 16.1 17.9 18.0 17.9 18.7 Poland 5.6 25.4 27.1 28.1 26.9 26.5 27.0 Portugal 19.8 19.5 20.2 22.2 23.3 21.7 23.0 Romania 2.9 2.6 1.9 1.6 1.3 0.9 1.1 Slovakia 4.0 4.9 5.0 5.3 4.0 4.1 5.7 Slovenia 12.8 16.8 17.9 18.5 16.9 16.4 17.7 Spain 32.4 33.3 34.4 31.9 29.4 25.3 24.9 Sweden 14.3 16.0 17.3 17.7 16.4 15.5 15.8 U.K. 6.6 5.4 5.5 5.7 5.2 5.4 6.1 Source: Eurostat Portal Page - Labour Market - Employment and Unemployment, 2010. Note: N/A - not available. Figure: Share of young people in temporary employment among employed young people (age group 15-24), 20101 80 70 60 50 as 40 JZ 30 20 10 0 m, 'n (z |E oc £ o üi -if Is S CU H li^ ^ uo I -a C JD Source: Eurostat Portal Page - Labour Market - Employment and Unemployment, 2010. Note: 1 data for second quarter of 2010. Part-time employment In 2010, the prevalence of part-time employment in Slovenia increased again, as it did in most other EU countries, although less than in 2009. Shortening working hours is one way how employers adjusted to decreasing demand during the crisis and it was supported in a number of EU countries by subsidies. Most EU countries recorded a smaller y-o-y increase in the share of part-time employment in total employment in the second quarter of 2010 than in the second quarter of 2009. people with lower education and those with higher education in Slovenia is much wider than in the EU as a whole, where 22.5% of people with lower and 15.6% persons with higher education worked shorter hours in the second quarter of 2010. Theshareofpart-time employment in total employment increased in Slovenia in 2010. The share of part-time employment in total employment (age group of 15-64 years) was 10.5% in the second quarter of 2010, a 1.9 p.p. increase over the same period of 2009. Part-time employment rose across all age groups of women, but only in certain groups of men. The share of men in parttime employment (7.5%) was 0.7 p.p. less y-o-y in the second quarter of 2010, largely due to a decline (1.4 p.p.) in the 25-49 age group, which was also related to a lower number of men participating in short-time working schemes in 2010. The corresponding share of women was 14.1% in the second quarter of 2010 (a 2.6 p.p. higher figure than in the same period of 2009), in particular due to the increase (7.7 p.p.) in the prevalence of this type of work among young women (15-24 years). In Slovenia, the share of part-time employment still lagged behind the EU average in 2010, except for the share of part-time employment among young people. The total share of part-time employment in total employment in Slovenia (10.5%) lagged behind the EU average (18.7%) in the second quarter of 2010. Notwithstanding this aggregate lag, Slovenia has a greater prevalence of part-time employment among the young (the 15-24 age group) than the EU as a whole. As with temporary employment, this is mainly attributable to student work. The share of young people working part-time totalled 42.2% in the second quarter of 2010, having increased by 4.7 p.p. relative to the same period of 2009. As in other countries, part-time employment is most widespread among people with lower levels of education, but Slovenia has a wider gap in the prevalence of part-time employment with regard to education than the EU average. The share of persons in part-time employment tends to decrease the higher the level of education attained. In the second quarter of 2010, part-time workers with lower education accounted for 20.9% of all workers with lower education in Slovenia (a 2.7 p.p. increase over the same period of 2009); the corresponding shares of workers with secondary and higher education were 9.9% and 7.0%, respectively. The gap in the prevalence of part-time employment among Table: Share of part-time employment in total employment (age group 15-64 years)1 2000 2005 2006 2007 2008 2009 2010 EU-27 N/A 17.4 17.7 17.7 17.7 18.2 18.7 Austria 16.0 20.4 21.5 22.0 22.7 24.1 24.5 Belgium 20.6 21.7 22.9 22.5 22.4 23.0 24.1 Bulgaria N/A 2.3 1.9 1.7 1.9 2.3 2.2 Cyprus 7.6 7.5 6.7 6.1 6.6 7.3 7.8 Czech Rep. 4.8 4.3 4.4 4.4 4.3 4.8 5.2 Denmark 21.4 21.5 22.9 23.6 23.9 25.1 26.3 Estonia 6.3 6.8 7.1 7.0 5.6 10.7 10.4 Finland 11.9 13.2 13.0 13.0 12.3 12.7 13.6 France N/A 17.1 17.2 17.2 16.9 17.1 17.6 Greece 4.4 4.6 5.6 5.5 5.2 5.8 6.1 Ireland 16.6 N/A 16.9 17.6 18.0 20.4 21.6 Italy 8.7 12.6 13.2 13.3 14.4 14.2 14.8 Latvia 10.5 8.9 6.0 6.4 5.7 7.6 8.9 Lithuania 8.9 6.3 8.6 7.9 6.3 8.2 7.7 Luxembourg 11.2 17.4 17.1 17.5 16.3 17.0 17.8 Hungary 3.4 4.1 3.9 3.8 4.1 5.2 5.3 Malta 6.1 8.8 9.6 10.7 11.4 11.0 11.1 Germany 19.1 23.6 25.4 25.6 25.5 25.5 25.7 Netherland 41.0 45.8 45.8 46.3 46.7 47.6 48.4 Poland 9.3 9.7 9.0 8.5 7.6 7.8 7.8 Portugal 8.1 8.4 8.1 8.9 8.8 8.6 8.5 Romania 14.0 9.6 8.6 8.6 8.8 8.6 10.5 Slovakia 1.8 2.3 2.7 2.6 2.1 3.8 4.0 Slovenia 5.3 7.8 8.4 8.8 8.1 9.7 10.5 Spain 8.0 12.6 12.1 11.8 11.9 12.8 13.4 Sweden 21.8 24.3 24.3 24.3 26.1 26.0 25.4 U.K. 24.4 24.6 24.3 24.2 24.2 25.0 25.7 Source: Eurostat Portal Page - Labour Market - Employment and Unemployment, 2010. Notes: 1 data for the second quarter; N/A - not available. Figure: Share of persons in part-time employment by age group, Slovenia and EU, 2010 45 40 35 30 jS? 25 jz 20 15 10 5 0 15-24 years 25-49 years Source: Eurostat Portal Page - Labour Market - Employment and Unemployment, 2010. 50-64 years Social-protection expenditure Slovenia allocated EUR 8,010 m1 for benefits and services of social-protection programmes in 2008 (21.6% of GDP), which is just above 8% more in nominal and almost 3% more in real terms than in 2007, and represents an increase of 0.2 p.p. as a share of GDP. Social-protection expenditure grew by an average of 3% per year in 1996-2008. After falling since 2000, social-protection expenditure as a share of GDP expanded slightly in 2008, as in other EU countries. In view of the decline or modest growth of GDP in 2009 and 2010, its share increased further, according to our estimates. In terms of social-protection expenditure in purchasing power standards per capita, Slovenia reached 75% of the EU average in 2008. A comparison of expenditure measured by purchasing power standards (PPS) per capita shows that Slovenia has reached approximately % of the EU average in the period since 2000 (73% in 2000; 75% in 2008). The lower level of expenditure compared with the EU is also due to the fact that Slovenia is among those EU countries in which social benefits are less burdened by taxes/contributions. In Slovenia, sickness benefits, parental benefits and unemployment benefits in particular are liable to taxes and contributions as, to a lesser extent, are pensions. A pilot study by Eurostat2 (based on 2005 data) shows that in the EU, more than half of social benefits are subject to taxes and/or contributions. In the EU, net expenditure on social-protection benefits accounts for around 93% of gross expenditure, while in Slovenia, it is around 95%. The difference between gross and net expenditures varies considerably between countries: in certain EU countries (the Czech Republic, Slovakia, Bulgaria and Romania), social benefits are practically not taxed (i.e., subject to social contributions), while in the countries with the greatest tax burden (the Netherlands, Denmark, Sweden, Poland, Finland and Italy), net social-protection expenditure accounts for less than 90% of gross expenditure. Slovenia belongs in the group of countries (along with Austria, Belgium, Luxembourg and Greece) in which the burden of taxes and contributions is below 5%. disability and survivors. The lowest proportion was spent on unemployment, housing, and social exclusion not elsewhere classified functions. Ranked by expenditure on individual social-protection functions in PPS per capita, Slovenia exceeds the EU average in social exclusion not elsewhere classified3 (111% of the EU average), reaching 90% of the EU average in the survivors' function, 86% in sickness and health care, 78% in the family and children function and 74% in old-age benefits. However, Slovenia is much below the EU average in expenditure on unemployment (29% of the EU average) and, most notably, expenditure on the housing function (2% of the EU average). Looking at total social-protection receipts by type, the contributions of protected persons are twice as high as in the EU. The major source of social-protection receipts in the EU is general government contributions (38.2%), followed by employers' contributions and contributions paid by protected persons (which account for the smallest share). In Slovenia, contributions of protected persons come first, followed by employers' and general government contributions, which are jointly second (see Figure). Expenditures on old age and sickness and health-care benefits continue to represent the greatest shares of social-protection expenditure in Slovenia, with social contributions paid by protected persons also the main source of social-protection receipts in 2008. In 2008, nearly two fifths of social-protection receipts were allocated for old age benefits, and close to one third for sickness and health. Slovenia allocated around 8% of total receipts for support of each of family and children, 1 According to the ESSPROS methodology. 2 Net expenditure on social-protection benefits; Statistics in focus. 3 In this function, Slovenia classifies data on benefits for the poor that in other countries are probably classified under other functions such as family and children, housing, etc. Table: Social protection expenditure in Slovenia and the EU, as % of GDP and in PPS per capita % of GDP Per capita in PPS, EU-15=100 2000 2005 2006 2007 2008 2000 2005 2006 2007 2008 EU-27 26.4 27.1 26.9(p) 25.7(p) 26.4(p) 100 100 100 100 100 EU-25 26.5 27.2 26.9(p) 25.9(p) 26.5(p) Austria 28.4 28.9 28.4 27.9 28.2 141 133 133 133 137 Belgium 26.2 29.6 30.2 26.8 28.3 125 131 137 120 124 Bulgaria 10.2 15.1 14.2 14.1 15.5 11 20 20 22 25 Cyprus 14.8 18.4 18.4 18.1 18.4 50 62 62 66 67 Czech Rep. 19.5 19.2 18.7 18.6 18.7 50 42 54 58 57 Denmark 28.9 30.2 29.2 28.8 29.7 144 138 136 135 135 Estonia 13.9 12.6 12.1 12.3 15.1 24 29 30 33 39 Finland 25.1 26.7 26.4 25.4 26.3 111 113 113 116 117 France 29.5 31.4 30.7 30.5 30.8 129 128 125 128 126 Greece 23.5 24.6 24.6 24.5 26 75 83 85 88 92 Ireland 13.9 18.1 18.4 18.9 22.1 69 96 100 108 113 Italy 24.7 26.4 26.6 26.7 27.8 109 102 104 107 107 Latvia 15.4 12.7 12.6 11.2 12.6 21 23 24 24 27 Lithuania 15.8 13.3 13.4 14.5 16.2 24 26 28 33 38 Luxembourg 19.6 21.7 20.4 19.3 20.1 182 203 207 206 213 Hungary 19.5 21.9 22.4 22.4 22.7 41 51 53 54 56 Malta 16.9 18.5 18.1 18 18.9 55 53 52 54 55 Germany 29.3 29.7 28.7 27.7 27.8 131 128 125 124 121 Netherland 26.4 27.9 28.8 28.3 28.4 134 134 141 146 145 Poland 19.7 19.7 19.4 18.1 18.6 36 37 38 38 40 Portugal 20.7 24.6 24.6 24 24.3 64 72 72 73 73 Romania 13 13.4 12.8 13.6 14.3 13 17 18 22 26 Slovakia 19.4 16.5 16.3 16 16 37 37 39 42 44 Slovenia 24.2 23 22.7 21.4 21.6 73 74 74 73 75 Spain 20.3 20.9 20.9 21 22.7 75 79 81 86 89 Sweden 30 31.1 30.3 29.1 29.4 145 140 139 141 137 U.K. 26.4 26.3 26 23.3 23.7 119 118 117 106 104 Source: Eurostat Portal Page - Total expenditure on social protection (ESSPROS), 2011, and Total expenditure on social protection per head of population, PPS (ESSPROS), 2011; calculations by IMAD. Notes: PPS - purchasing power standards; p - provisional data; N/A - not available. Except for 2005, 2006 and 2007, data for Slovenia exclude housing data. Figure: Social protection receipts by type, Slovenia, EU-27, 2008, in % 50 45 40 35 30 25 20 15 10 5 0 Employers' social contributions Social contributions paid by protected persons Source: Eurostat Portal Page - Social protection receipts by type (ESSPROS), 2011 General government contributions (taxes) Other Expenditure on health Total expenditure on health as a share of GDP reached 9.2% in 2009 and 8.9% in 2010.1 Public expenditure accounted for 6.6% of GDP in 2009 (having increased by 0.6 p.p. compared with 2008 due to the impact of both a decline in GDP and real growth in expenditure), while private expenditure accounted for 2.6% of GDP. Public expenditure as a share of GDP dropped to 6.4% in 2010, while private expenditure remained at 2.6%. The conditions of public financing have tightened significantly in Slovenia over the last two years owing to weak growth in compulsory health-insurance contributions. In addition to the economic crisis, the problems were compounded by high wage rises in the health sector, which translated into 3.1% real growth in public expenditure on health in 2009, despite measures to ensure the sustainability of Slovenia's compulsory health-insurance system. After the slowdown in wage growth and adoption of additional measures, total public expenditure on health dropped by 3.4% in real terms in 2010,2 according to preliminary estimates. Private health expenditure, in contrast, continued to grow in 2009 and 2010. In 2010, it already represented 28.8% of total expenditure on health. This significant growth was mainly due to the measure that reduced cost coverage by the compulsory health-insurance system for certain medical services and transferred a portion of costs to complementary health insurance. Until 2008, Slovenia was among the EU countries with the lowest growth of health expenditure (in relative terms) compared with GDP growth. According to OECD calculations, real growth in total health expenditure per capita surpassed real GDP growth per capita in all EU countries except Estonia in 1998-2008, by 1.6 p.p. per year, on average (in Slovenia, by a mere 0.6 p.p.). In most EU countries, public expenditure increased more than private expenditure in that period. In the EU as a whole, public expenditure on health rose from 5.3% of GDP to 6.2% of GDP between 2000 and 2008. Slovenia, in contrast, recorded much stronger growth in private than public expenditure in the same period. Public expenditure as a share of GDP even dropped slightly (see Table), while the share of private expenditure increased. on all indicators, accounting for 6.0% of GDP (EU: 6.2%), 71.9% of total health expenditure (EU: 73.6%) and 13.8% of total public expenditure (EU: 14.4%). Conversely, private expenditure climbed to 2.3% of GDP in 2008 (EU: 2.1%), reaching as much as 28.1% of total expenditure on the back of higher co-payments from complementary health insurance, higher out-of-pocket expenditure by households and strong growth in private investment in health. Expenditure from complementary insurance thus represented 44.0% of private health expenditure in 2008, out-of-pocket expenditure by households 45.2% and health expenditure from other private sources (private companies and entrepreneurs in the health-care sector) as much as 10.7%. Over the last few years, out-of-pocket expenditure as a share of total final household consumption has increased most notably for households in the lowest income bracket. Out-of-pocket expenditure in Slovenia is still relatively low compared with other EU countries, both as a share of total health expenditure (12.7%, compared with the EU average of 20.0%) and share of total household consumption (2.0%, compared with 3.0% for OECD countries). According to the Household Budget Survey, in 2008, households in the lowest income quintile experienced the greatest burden of health expenditure (in relative terms), spending on average 2.8% of their total expenditure on health (1.5% in 2005), while in higher-income households, health expenditure represented 1.5% of total expenditure. Slovenian households allocated the greatest share of out-of-pocket expenditure for medicines (23%), medical devices (20%), various other health services (physiotherapy) and alternative medicine (17%), dental care (14%) and outpatient specialist services (9%). In the period 2003-2008, the greatest increases were recorded for out-of-pocket expenditure on outpatient specialist services, rehabilitative care, long-term nursing care, diagnostic imaging, and primary-care services and diagnostic procedures. The level of public expenditure on health in Slovenia is below average on all internationally comparable indicators. Slovenia spent 8.3% of GDP on health in 2008, equal to the EU average. Although public expenditure on health in 2008 increased much more than in the previous period (9.7% in real terms), it remained below average 1 Data for 2009 and 2010 are HIIS estimates (HIIS Business Report for 2010). 2 HIIS expenditure on health declined by 2.3% in real terms (total HIIS expenditure including sick leave compensation, by 1.4%) while 2010 saw a sizeable decline in budgetary expenditure on investment, which nearly halved in real terms. Table: Expenditure on health in the EU-27, 2000 and 2008 Total health expenditure, as % of GDP2 Public health expenditure, as % of GDP2 Private health expenditure as a share of total health expenditure, in % Public health expenditure, as % of general government expenditure 2000 2008 2000 2008 2000 2008 2000 2008 EU-27 7.3 8.3 5.3 6.2 27.1 26.5 12.0 13.7 Austria 9.9 10.5 7.6 8.1 23.2 23.1 15.8 15.8 Belgium 9.0 10.2 6.6 7.4 23.0 25.3 12.8 14.8 Bulgaria 6.1 7.3 3.7 4.2 39.1 42.2 7.7 12.5 Cyprus 5.7 5.8 2.4 2.5 58.3 57.9 7.1 7.0 Czech Rep. 6.5 7.1 5.9 5.9 9.7 17.5 13.7 16.8 Denmark 8.3 9.9 6.8 8.4 17.6 15.5 12.3 15.0 Estonia 5.3 6.1 4.1 4.8 22.5 20.6 11.8 13.0 Finland 7.2 8.4 5.1 6.2 28.9 25.8 11.9 14.3 France 10.1 11.2 8.0 8.7 20.6 22.2 13.8 14.9 Greece 7.9 9.7 4.7 5.9 40.0 39.7 8.4 10.6 Ireland 6.3 8.7 4.6 6.7 24.7 23.1 16.6 18.6 Italy 8.1 9.1 5.8 7.0 27.5 22.8 13.0 14.6 Latvia 6.0 6.5 3.2 3.6 45.6 40.4 10.4 12.5 Lithuania 6.5 6.6 4.5 4.8 30.3 27.4 10.5 13.3 Luxembourg 5.8 6.8 5.2 5.7 8.4 8.6 10.9 12.0 Hungary 7.0 7.3 5.0 5.2 29.3 29.0 10.4 9.9 Malta 6.8 7.5 4.9 5.8 27.5 22.6 12.0 12.4 Germany 10.3 10.5 8.2 8.1 20.2 23.2 14.7 15.2 Netherland 8.0 9.9 5.0 7.4 32.0 16.5 8.4 13.0 Poland 5.5 7.0 3.9 5.1 30.0 27.7 n.p. 11.7 Portugal 8.8 10.1 6.4 7.1 27.5 28.5 14.9 14.0 Romania 5.2 5.4 3.6 4.5 32.3 18.0 11.3 11.2 Slovakia 5.5 7.8 4.9 5.4 10.6 30.4 10.0 19.2 Slovenia 8.3 8.3 6.1 6.0 26.0 28.1 13.8 13.8 Spain 7.2 9.0 5.2 6.5 28.4 27.5 13.4 14.8 Sweden 8.2 9.2 7.0 7.6 15.1 18.1 11.1 13.2 U.K. 7.0 8.7 5.6 7.2 20.7 17.4 14.5 15.7 Source: OECD Health Data 2010, Eurostat, WHO HFA-DB; data for Slovenia are for 2008: Health expenditure (SORS) 29 October 2010. Notes: For the EU-27, arithmetic average according to OECD Health at a glance: Europe 2010. For the EU-27, weighted average according to the European Commission (source: J EPC-EC Report on Health Systems; general government expenditure according to COFOG (source: Eurostat) 2 Revision of GDP of September 2010; N/P - not available. Figure: Annual average real growth in health expenditure and GDP, per capita, 1998-2008 I? IS .SE m -C u ^ 15 i2 CP tu 9 8 -7 - 6 5 -4 -3 -2 -1 -0 0 1 2 3 4 5 6 Annual average real growth in GDP per capita Source: OECD Health at a glance:Europe 2010. Note: (Estonia (EE): 1999-2007; Luxembourg (LU), Portugal (PT): 1998-2006; Denmark (DK), Greece (GR): 1998-2007. 7 8 9 Expenditure on long-term care Total expenditure on long-term care (LTC)1 as % of GDP in Slovenia is approximately at the EU average, but Slovenia lags behind the EU in expenditure on long-term care per capita. Total expenditure on long-term care as a share of GDP rose somewhat in Slovenia in 2008 (the latest available data) - to 1.08% of GDP (1.02% in 2007). Public expenditure was 0.82% and private expenditure was 0.26% of GDP; broken down by function, expenditure on long-term health care represented 63.0% and expenditure on long-term social care2 37.0% (see Table). Due to the beginning of the economic crisis and a consequent slowdown in economic growth, total LTC expenditure as a share of GDP rose slightly in 2008 in all EU countries for which data are available, to an average of 1.1% of GDP. It is estimated to have increased further in 2009 and 2010 due to the decline or lower growth of GDP in most EU countries. Slovenia otherwise has a wider gap with developed countries in per capita LTC expenditure than in LTC expenditure as a share of GDP. The former amounted to EUR 197 in 2008 (public expenditure EUR 124; private expenditure EUR 73), or 255 EUR PPS, which is much less than in other, more developed, European countries (see Figure). In addition to the different levels of development, the gaps between the countries also reflect differences in long-term care systems, the influence of demographic factors and life patterns, particularly regarding the role of family and informal care. Public expenditure on LTC strengthened significantly in 2008, particularly the share of public expenditure on long-term health care. Total LTC expenditure grew to 1 Long-term care is an organised form of health and social assistance provided to individuals who need help with their daily routine for a period longer than six months. This definition of long-term care (LTC) is the basis for the single methodology used in monitoring expenditure on LTC. It was proposed by three international institutions (the OECD, Eurostat and theWHO) at the end of 2005. 2 Long-term health care is mostly financed from public sources (92.6% in 2008). These are mostly the HIIS funds intended for health care services in residential homes for the elderly and specialised social institutions, extended hospitalisation, and partly the home-nursing service providing long-term health care. Long-term health care also includes funds of the PDII earmarked for 'attendance allowances'. Persons entitled to this allowance are those who are dependent on the assistance with basic activities of daily living (ADL). Close to one half of expenditure on long-term social care (48.0% in 2008) is covered by public sources (the state and local budgets) and slightly more than one half by private funds (52.0%). Private funds mostly comprise extra payments for the accommodation and food in residential homes for the elderly and other types of institutional care as well as household expenditure on home assistance. 7.2% in real terms in 2008 (2.4% in 2007). Following very low growth in public expenditure and a rapid increase in private expenditure in 2006 and 2007, expenditure from public sources strengthened to 8.2% in real terms in 2008. Expenditure on long-term health services (carried out in old people's homes and covered by compulsory health insurance) recorded the greatest increase in 2008 (by 10.1% in real terms), largely due to a sizeable increase in capacities and, consequently, a higher number of users. The increase in expenditure was also partly due to the process of diminishing wage disparities in the public sector. Relatively high growth was also seen in 2008 in local-government expenditure on long-term social care. The share of public expenditure on long-term social care covered by municipalities is otherwise every year higher (60% in 2008). Growth in private expenditure, in contrast, moderated in 2008 compared with the previous two years (to 4.2% in real terms) and was somewhat lower than the average in the preceding period, both in long-term health- and social-care services. Broken down by sources of finance, the share of public expenditure in total LTC expenditure rose in 2008 (to 76.1%) and broken down by function, the share of expenditure on long-term health care services (to 63.0%). LTC expenditure rose by as much as 29.5% in real terms in 2003-2008 (by 5.3% per year, on average), with public and private expenditures growing at practically the same rates; in terms of function, expenditure on health recorded stronger growth than expenditure on social services. Slovenia allocates less than a quarter of total LTC expenditure for long-term care at home, and this share even declined somewhat in 2008. Slovenia lags behind other European countries especially in provision of help for elderly people living at home, which is also reflected in expenditure. According to the European Commission,3 most EU countries allocate more than 50% of public expenditure on long-term care; countries with more developed long-term care systems tend to allocate even more, while Slovenia dedicates only one third of expenditure for this purpose. The number of people receiving long-term care at home has otherwise increased somewhat faster in Slovenia over the past few years than the number of institutional long-term care users, but the share of total (public and private) expenditure on long-term care at home nevertheless dropped further in 2006-2008 (2006: 27.1%; 2007: 26.5%; 2008: 26.1%) due to the lower costs associated with this type of care (as a result of a low volume of services per user). 3 European Commission (Feb. 2011): Health and long-term care expenditure projections: collection/availability of data. The calculation is based on data from the System of Health Accounts in ESPROSS. Table: Expenditure on long-term care by source of financing and by function, Slovenia, 2003-2008 EUR m Share in GDP, in % Structure, in % Real growth, in % Average annual growth, in % 2003 2007 2008 2003 2007 2008 2003 2007 2008 08/07 08/03 03-08 Long-term care 260 354 401 1.04 1.02 1.08 100.0 100.0 100.0 7.2 29.5 5.31 By source of financing: Public sources 198 267 305 0.79 0.77 0.82 76.1 75.4 76.1 8.2 29.6 5.32 Private sources 62 87 96 0.25 0.25 0.26 23.9 24.6 23.9 4.2 29.3 5.27 By function: Health care 157 218 253 0.62 0.63 0.68 60.3 61.5 63.0 9.8 35.5 6.26 Social care 103 136 148 0.41 0.39 0.40 39.7 38.5 37.0 3.1 20.5 3.79 Source: SORS, 2010. Figure: Expenditure on long-term care, Slovenia and selected EU countries, in EUR PPS per capita, 2008 1,200 1,000 800 600 400 200 1131 929 722 626 601 525 406 395 386 1 216 101 55 46 U LJ^ Source: Eurostat Portal Page, 2011. Note: Year 2007 for Norway, Switzerland, Finland, Denmark, Belgium, France and the Netherlands. !5 C 3 TS C o 'iZ C tO 'n (Z 3 'iZ £ -o C CD .C u C < <ü JZ Iv z LU (D JZ '.IJ Q. 3 I u 558 478 436 79 48 43 41 0 Human development index In 2010, the Human Development Index (HDI) for Slovenia was 0.828, which places Slovenia 29th among 169 countries. The HDI is one of the main composite indicators of social well-being, measuring three dimensions of human welfare: health, education and income. As the index underwent a series of changes in 2010, the HDI for 2010 is not comparable with the released values for previous years.1 Slovenia remains in a group of countries with very high human development and the values of the included indicators are also rising gradually. The value of the health indicator is highest (with life expectancy at birth being 78.8 years, according to the UNDP) while the value of the income indicator is the lowest. The composite index of education comprising mean years of schooling of the population aged 25 and older and expected years of schooling is particularly worth mentioning in 2010. According to the Unesco Institute for Statistics, mean years of schooling in Slovenia of the population aged 25 and older was only 9 years in 2010. However, we find that this data for Slovenia is much lower than the Slovenian estimate.2 In the EU-27, only Portugal had a lower value of this indicator (8.0 years) than Slovenia, while the OECD average was 11.4 years. Expected years of schooling, another indicator of the education index, shows a different picture, namely that a child of school-entrance age can expect to receive 16.7 years of schooling in Slovenia, on average. Slovenia exceeds the EU average (15.6 years) and the OECD countries (15.9 years) on this indicator. Among the analysed 169 countries, the highest values were recorded in Australia (20.5 years) and New Zealand (19.7 years).3 country, totalled 0.771 in 2010, 6.9% less than the value of the HDI.4 The distribution of well-being by gender is relatively favourable in Slovenia. The value of the new Gender Inequality Index (GII), which measures reproductive health, gender differences in educational attainment and participation in politics and in the labour force,5 totalled 0.293 in 2010 (data from 2008), which ranks Slovenia 17'h among the selected 138 countries. The value of the Slovenian GII indicates that there are differences in the distribution of well-being dimensions between women and men, largely on account of poor political representation of women. The share of women in the Slovenian parliament (10% according to the UNDP data for 2008) is below the global average (16.2%) and even below the average of countries with the lowest levels of development (16.6%) and remains significantly lower than in Scandinavian countries (40.7%), which are in the lead in this area. As this is one of the key indicators of equal opportunities in society, rethinking the strategic measures to reach a proportional representation of genders in politics is required. Although there are inequalities in the distribution of the three basic dimensions of well-being in Slovenia, they are the lowest among the selected 169 countries. The value of Slovenia's Inequality-adjusted Human Development Index (IHDI), which measures disparities in the distribution of income, health and education in a 1 Several improvements to the methodology for calculating the HDI as well as to income and education indicators were introduced in 2010 (more on this in the Slovenian Economic Mirror, November 2010, 15(11): 30-31). The HDI according to the new indicators and the new methodology is calculated for a period of five years between 1980 and 2010, depending on availability of data. 2 If the HDI is calculated using IMAD's estimate of the average years of schooling (11.5 years), Slovenia's HDI for 2010 amounts to 0.862 (IMAD's calculation), equal to the HDI value in Hong Kong, which is ranked 21st among the 169 countries. For details see the indicator Average years of schooling. 3 As these indicators do not take into account the dropout and repetition rates and the quality of education, they should be complemented by other indicators of education and training. 4 The IHDI takes values between 0 and 1; a higher value denotes lower inequalities in a country. The IHDI should always be viewed alongside the HDI: When there is no inequality in the well-being dimensions in a country, the IHDI will be equal to the HDI; the greater the difference between the two, the greater the inequality in the distribution of development achievements across people in society. 5 The GII replaced the Gender-related Development Index (GDI) and the Gender Empowerment Measure (GEM). It ranges between 0 and 1, but unlike the HDI, higher values of the GII indicate worse achievements. Figure: The HDI and its components, Slovenia, 1970-2010 1.0 0.9 0.8 0.7 -HDI - Education index ----Income index -----Health index 0.6 7777777777888888888899999999990000 Source: UNDP Human Development, 2010. Note: The index is calculated according to the new methodology from 2010 for the whole period based on the indicators from previous years (the income index is thus measured by GDP per capita in purchasing power parity terms in US dollars, the education index by the literacy rate and gross enrolment ratio at all three levels of education, and the health index by life expectancy at birth). These values can, therefore, no longer be compared over time. Minimum wage The new Minimum Wage Act set the minimum wage 22.9% higher in March, but the actual increase was smaller due to the possibility of a gradual transition to the new minimum wage level in the period MarchNovember (the minimum wage was up 15.7% in March compared with February, and up 16.5% on average in the March-December period). The Minimum Wage Act allowed for a gradual convergence to the new level until the end of 2011,1 but around 60% of minimumwage earners were already receiving the highest level of minimum wage2 in March. The ratio of the average minimum wage in the private sector (EUR 678) to the average gross wage in the private sector (EUR 1408) therefore rose to 48.2% in 2010 (44.2% in 2009). According to Eurostat, Slovenia was ranked in the upper half of EU countries according to this ratio in 2009, but is set to climb to the top with the new level of minimum wage, according to our estimates. to 34,875 (of whom 70% received minimum wages in the highest category) while their share expanded from 3.9% to 7.7%. In the public sector, the share of minimumwage recipients was much smaller (2.5%), even though the increase in their number was more than seven times higher (from an average of 551 in 2009 to 4,166 in December). The higher minimum wage contributed to wage rises particularly in the private sector. Judging by wage movements, more than 3 p.p. of annual wage growth can be attributed to the impact of the higher minimum wage. With the increase in minimum wage being less gradual than anticipated, the bulk of wage growth expected from the increase in minimum wage was already realised in 2010. The new act brought the policy of setting the minimum wage and the method of its adjustment closer to the system that had been in force until 2005. The minimum wage is an amount earned by a person in paid employment for full time work and therefore includes all wage-forming components (seniority pay, performance-related bonuses, etc.). The minimum wage is now adjusted with consumer price growth on January 1 (instead of on August 1 as previously). The method of wage adjustment on the basis of inflation forecasts for the current year was replaced by a method taking account of last year's inflation.3 In agreement with the social partners, the minimum wage can be additionally raised based on wage growth, economic conditions or economic growth and movements of employment. The number of minimum-wage earners increased significantly after the new act took effect. Fewer employers than expected took advantage of the gradual increase, as according to the latest available data (December 2010) as many as 73% of minimum wage earners already received the minimum wage in the highest category. The number of all minimum-wage recipients doubled from 19,047 (the 2009 average) to 39,041 (December 2010) while the share of minimumwage recipients in all employed persons rose from 3% in 2009 as a whole to 6.4% in December 2010. More than 90% of all minimum-wage recipients are in the private sector. By December, their number increased from 18,478 1 A gradual transition to the new minimum wage level is possible if an immediate increase would result in substantial losses threatening the very existence of the enterprise, and only in consent with the representatives of workers. 2 Due to the possibility of different minimum wage levels, AJPES collects data separately for three ranges of the minimum wage (up to EUR 654, EUR 685 and EUR 734). 3 Inflation in December of the current year compared with that in December of the previous year. Table: Minimum gross wage, average gross wage and minimum gross wage to average gross wage ratio, Slovenia, 20002010 Minimum wage in the private sector since 2010 Nominal growth of minimum wage Real growth of minimum wage Average gross wage in the private sector Nominal growth of the gross wage in the private sector Real growth of the gross wage in the private sector Minimum wage to average wage ratio in the private sector 2000 322 741 43.5 2001 366 13.5 4.7 822 10.9 2.3 44.5 2002 408 11.5 3.7 904 10.0 2.3 45.1 2003 445 9.0 3.2 969 7.1 1.4 45.9 2004 476 7.0 3.3 1.035 6.8 3.1 46.0 2005 499 4.9 2.3 1.080 5.4 2.8 46.2 2006 516 3.3 0.8 1.138 5.4 2.8 45.3 2007 529 2.5 -1.1 1.217 6.9 3.2 43.5 2008 571 8.0 2.2 1.312 7.8 2.0 43.5 2009 593 3.7 2.8 1.339 1.8 0.9 44.2 2010 678 14.5 12.4 1.408 5.2 3.3 48.2 Source: SORS, SCA 2002 until 2008, SCA 2008 from 2009 onwards. For 2010, different amounts of minimum wage by activity and in both sectors. Figure: Ratio of minimum gross wage to average gross wage in the private sector, EU Member States, 2009 60 50 40 30 20 10 Source: Eurostat. Note: private sector excluding agriculture and fishery; data for other EU-27 countries not available. For Belgium, Greece, France, Spain, Hungary, the Czech Republic, Romania and Estonia, the figure is for 2008; for Ireland, for 2007; and for Slovakia, for 2006. 0 Risk of poverty and material deprivation of the population In 2009,1 the at-risk-of-poverty rate was 1.0 p.p. lower than a year earlier and the situation of certain already highly vulnerable groups worsened. Altogether 11.3% of the population, or 223,000 persons, lived below the poverty threshold in 2009 (in 2008, 12.3% or 241,000 persons). Slovenia is still characterised by significant differences between the socio-economic categories.2 The situation of certain vulnerable population groups deteriorated compared with the previous year (unemployed persons, couples with three or more children, jobless households with dependent children and single households). Furthermore, poverty deepened in Slovenia. The relative at-risk-of-poverty gap thus amounted to 20.2% in 2009, increasing by nearly 1 p.p. compared with 2008. Long-term poverty3 is very low (7.7% in 2008, according to the latest available data), which implies relatively successful social inclusion. The low rate is to a great extent attributable to social transfers reducing the poverty risk by 49% (in the EU-25, only by 36%), particularly for children. Compared with the EU (15.9%), Slovenia remains in the group of countries with the lowest relative poverty rates. The poverty risk has also declined slightly in the EU-25, but Slovenia continues to be among the countries with relatively the best results (see Table). Comparison on the long-term poverty rate is also favourable, as Slovenia is placed among the countries with the lowest long-term poverty rates in the EU-15. which shows the ratio of total income received by the 20% of the population with the highest income to that received by the 20% of the population with the lowest income, was 3.2 in 2009 (3.4 in 2008). These indicators have, as with the at-risk-of-poverty rate, also been calculated using data for 2008. Income inequality also declined slightly in the EU-25. With both the lowest Gini coefficient and the lowest quintile-share ratio, Slovenia was once again ranked first among the EU countries for income inequality. Other data from the EU-SILC also indicate that the living conditions did not change significantly in 2009. These data are, for example: the degree of ease or difficulty the household had in making ends meet: (28% of households had difficulty or great difficulty in making it through the month); the burden of housing costs and loans (36% of households considered housing costs a heavy burden in 2009); the number of households in arrears with mortgage loans (11%) or payments of rent (23%); the share of households living in poor housing conditions and facing at least one of the following problems: a leaking roof, damp walls/foundations/floors, rot in window frames or floor (31% of Slovenian households in 2009). In 2009, the values of these indicators were practically the same as in 2008. After increasing notably in 2008, the material deprivation rate remained at approximately the same level in 2009. In 2009, it was 16.2% (in 2008, 16.8%), which was still somewhat below the EU average (17.2%). In Slovenia, only 40.9% of people with income below the at-risk-of-poverty threshold were also materially deprived, and 13% of those with income exceeding that threshold (see Figure). There are, however, significant gaps between individual Member States, as certain countries with low at-risk-of-poverty rates have high material deprivation rates, while for others the reverse is true. Income inequality indicators for2009show that income inequality declined. The Gini coefficient was 22.7% (23.4% in 2008) and the quintile share ratio (S80/S20), 1 Based on incomes in 2008. 2 E.g.: The at-risk-of-poverty rate for people with a lower education (lower than secondary education) was 22.9%, while for those with a higher education (post-secondary and higher education) it was only 2.6%. 3The long-term poverty rate indicates the share of the population living below the poverty line for three consecutive years. Table: Selected at-risk-of-poverty and income-inequality indicators, Slovenia and EU-25, (excluding income in kind) Year 2000 2005 2006 2007 2008 2009 At-risk-of-poverty rate, in % SLO EU-25 SLO EU-25 SLO EU-25 SLO EU-25 SLO EU-25 SLO EU-25 total population (after social transfers) 13.0 16.0 12.2 15.9 11.6 16.1 11.5 16.2 12.3 16.1 11.3 15.9 before social transfers1 37.2 23.0 25.9 25.7 24.2 25.9 23.1 25.6 23.0 24.8 22.0 24.9 women 18.0 17.0 13.6 16.6 13.0 16.8 12.9 17.1 13.6 17.0 12.8 16.7 men 12.5 15.0 10.6 15.2 10.3 15.3 10.1 15.4 11.0 15.1 9.8 15.1 children (aged 0-18) N/A N/A 12.1 19.2 11.5 19.1 11.3 19.3 11.6 19.5 11.2 19.3 young people (aged 18-24) N/A N/A 10.0 19.0 8.9 20.0 9.1 20.0 9.7 20.0 7.7 20.0 elderly (aged 65+)2 21.0 17.0 20.4 18.4 20.0 18.5 19.4 18.9 21.3 18.4 20.0 17.3 single-parent families3 17.5 30.04 22.0 31.2 22.3 32.4 28.6 33.4 28.8 35.5 28.1 34.0 couples with three or more dependent children (large family) 10.0 N/A 16.6 24.5 15.2 24.2 15.2 24.2 11.3 24.6 15.7 24.5 jobless households with dependent children N/A N/A 54.2 60.3 59.1 62.2 54.4 63.7 57.0 61.2 60.4 56.0 single households 36.0 N/A 44.0 23.4 42.4 23.5 39.2 24.9 41.9 25.4 43.4 25.2 unemployed 39.5 N/A 24.9 39.5 32.8 40.9 35.9 42.5 37.6 44.2 43.6 45.1 tenants 16.6 24.0* 25.7 22.8 21.9 22.8 25.7 24.9 25.2 25.4 22.0 25.5 Income inequality indicators: quintile share ratio 80/20 3.1 4.5 3.4 4.9 3.4 4.8 3.3 4.8 3.4 4.8 3.2 4.8 Gini coefficient 22.0 29.0 24.1 30.3 23.8 29.9 23.3 30.2 23.4 30.4 22.7 30.2 Source: SI-STAT data portal, 2010; Eurostat; SILC, 2010. Notes: 1 pensions included in income; 2 poverty of the elderly regardless of what type of household they live in; 3 in terms of statistics, this indicates a single-parent household with at least one dependent child; 4 data for 2001; N/A - not available. Figure: Material deprivation rates, Slovenia, 2005-2009, in % 50 45 40 35 ..30 ^^ 25 20 15 10 5 0 2005 2006 2007 Source: SORS, Statistics on Income and Living Conditions (EU-SILC). - Material deprivation rate Above the poverty threshold Below the poverty threshold 2008 2009 Healthcare resources The number of physicians in Slovenia remains low despite a rise in the recent years. According to the estimates based on the demands reported to the Medical Chamber by the public-health institutes in 2010, Slovenia has a shortage of about 500 physicians. In 2009, the number of practicing physicians rose by 45 (in 2008 by 40) reaching a total of 4915, whereas their number per 100,000 people was 240.7 (in 2008: 238.8). In the EU, the number of practicing physicians per 100,000 people was 323.7 on average in 2008, meaning that Slovenia is still ranked at the bottom end of the EU countries in terms of this indicator (with only Poland and Romania lagging behind). In the period 2000-2008, Slovenia even slightly widened the gap behind the EU average. In 2010, some measures were taken to increase the inflow of foreign physicians1 and to augment the enrolment at the faculty of medicine,2 with some positive effects being expected also from a high increase in the salaries of public sector physicians in recent years. Slovenia lags behind the most by the number of general practitioners. In 2009, the indicator of the number of general practitioners per 100,000 people increased more than in previous years, reaching 54.3 (in 2008: 50.0), whereas the EU average was 85.6. There is still a shortage of general practitioners in Slovenia; the regional coverage and provision of certain services are the main problems. In the last three years, the minimum standards have been met thanks to priority funding of extra teams of general practitioners and children/school out-patient centres in the regions with below-average capacities. The importance of providing adequate number of general practitioners in the healthcare system has been increasingly in the forefront, not only because it provides equal access to healthcare but also because it leads to greater cost-efficiency of the healthcare system. Namely, certain services have already been transferred from the secondary to the primary level with the aim of lowering the costs; better access to a general practitioner could reduce emergency admissions, which are much more expensive to treat; general practitioners have been increasingly seen as gatekeepers who could reduce the cases of costlier treatment at specialised health care. Besides, the workload of general practitioners has been rising because of an increasing number of chronic patients, demographic changes and higher expectations of patients. One of the indicators showing the capacity of the primary level to take on this greater workload is the proportion of general practitioners to specialists. Also on this indicator Slovenia lags behind the EU average, with a 20.8% share of general practitioners in the total number of physicians, whilst in the EU this figure is 25.0%. In almost all EU countries, the number of specialists has been generally rising faster and the number of general practitioners has been on the decline over the last decade. Most countries have, in turn, taken measures to address the shortage of general practitioners, trying to attract medical graduates to become general practitioners (changes in financing, non-financial incentives); at the same time, registered nurses have also taken on more responsibility at the primary level. In 2010, Slovenia also took measures to strengthen primary healthcare and take some burden off the general practitioners: (i) introduction of 40 new training primary health care offices, where doctors specialising in general medicine will already be able (under tutorship) to register their patients; (ii) introduction of 40 reference primary health care offices, where registered nurses will assume greater responsibilities (in particular in managing patients with chronic illnesses); (iii) additional funds for expansions at the primary level.3 1 A new Act on recognition of professional qualifications of medical doctor, specialist doctor, doctor of dental medicine and dental medicine specialist has been adopted (Ur.l. RS, No. 107/2010), which shortens the procedures for recognition of qualifications obtained in one of the non-EU, EEA or Swiss confederation members. 2 An increase by 30 additional posts was agreed upon at the Faculty of Medicine in Ljubljana and Maribor for the academic year 2011/2012. Slovenia lags behind the OECD average in terms of the number of medical graduates per 100,000 people. 162 doctors graduated in 2009, i.e. 7.9 graduates per 100,000 people. The OECD average was 9.9 in 2007; in some countries, it is much higher (Denmark 21.7; Austria 19.4; Ireland 16.5). 3 Additional EUR 5.2 million per year was provided in total in 2011 for these measures. Table: Human resources in the healthcare system in Slovenia1 and EU countries Practicing physicians per 100,000 people General practitioners per 100,000 people Practicing dentists per 100,000 people Practicing nurses per 100,000 people Nurses to physicians ratio 2000 2007 2008 2000 22008 32008 42000 2008 520 08 EU-27 293.6 323.5 323.7 83.4 85.6 62.6 695.3 775.2 2.6 Austria 384.9 452.5 458.5 134.6 153.0 54.4 728.6 774.0 2.0 Belgium 385.0 401.6 293.2 175.1 117.0 71.9 583.8 659.5 2.2 Bulgaria 337.8 365.3 361.3 N/A 65.2 82.7 437.0 466.5 1.3 Cyprus 258.0 271.5 285.6 37.4 N/A 93.2 422.5 436.0 1.5 Czech Rep. 337.1 354.6 352.7 51.2 71.0 66.6 805.7 774.0 2.2 Denmark 290.5 341.0 N/A 71.9 68.4 83.8 1257.0 1459.3 4.6 Estonia 327.0 326.7 335.0 88.2 105.3 92.3 623.1 670.0 2.0 Finland 249.7 268.3 271.4 37.7 103.0 78.0 1436.0 1547.0 5.7 France 327.2 335.0 334.0 161.1 163.0 67.8 688.6 798.9 2.4 Greece 432.3 556.0 602.0 27.7 27.2 130.8 309.0 364.0 0.6 Ireland 222.7 302.8 311.2 48.0 54.2 61.37 1400.5 1615.0 5.0 Italy 416.3 363.5 412.5 83.0 79.0 47.7 N/A 700.4 1.9 Latvia 288.4 304.5 311.3 40.6 58.0 67.0 479.0 553.2 1.8 Lithuania 364.0 372.8 370.6 51.9 68.3 65.9 805.3 735.2 2.0 Luxembourg 213.7 282.1 N/A 74.3 82.0 78.8 863.8 1571.5 4.5 Hungary 268.5 280.6 309.3 66.0 65.4 50.5 579.2 632.0 2.0 Malta N/A N/A 303.9 N/A 77.7 43.8 N/A 678.3 2.0 Germany 325.8 350.5 356.2 106.6 99.2 77.4 939.7 781.2 3.1 Netherland N/A N/A N/A 45.5 54.0 50.0 N/A N/A N/A Poland 222.3 219.1 216.1 8.0 17.4 34.2 553.2 577.0 2.7 Portugal 263.5 N/A N/A 44.2 N/A 66.8 353.2 N/A 1.4 Romania 192.8 212.3 221.5 N/A 80.6 55.1 530.1 639.6 2.9 Slovakia 323.9 300.0 N/A 43.2 36.3 49.9 750.7 631.6 2.0 Slovenia1 215.0 239.5 238.8 45.7 50.0 59.8 685.0 794.0 3.3 Spain 331.8 368.3 352.2 N/A 84.0 56.4 658.2 815.8 2.3 Sweden 307.8 356.6 360.0 52.8 60.2 82.7 1031.0 1155.0 3.2 U.K. 196.2 249.5 257.7 71.1 78.8 50.9 916.0 1005.0 3.9 Sources: Eurostat; OECD Health Data 2010, WHO HFA-DB. Source for EU-27 average for physicians, general practitioners, dentists and nurses is WHO HFA-DB (the methodologies of data reporting for these categories were standardized in 2007 for Eurostat, WHO and OECD). Source for the EU average for the nurses to physicians' ratio is OECD. Notes: 1 Indicators for Slovenia in the text are for 2009, whereas in the table the data is for 2008, as these were the latest available data for the EU countries; 2 2007: BG, DK, EE, LU, ES and 2006: DE, RO, SK, SE. 3 2007: DK, FI, LU, SK, SE; 4 2007: BG, DK, ES, LU, ES. 5 2007: AT, BG, DK, IT, LT, LV, LU, MT, DE, PT, SK, SE. Figure: General practitioners, specialists and other physicians, as a % of total number of physicians, 2008 Other physicians SS Specialists ■ General practicioners 100 90 80 70 ^ 60 50 40 30 20 10 0 50.2 48.7 llli 33.5 33.2 33.2 28.8 28.7 25.6 25.0 22.9 22.8 20.9 3 J^ LU 20.0 19.9 18.8 18.4 -if cd £ -C u c