Commission Consultative Des Mutations Industrielles CCMI

Comité économique et social européen – CESE

Commission consultative des mutations industrielles – CCMI

Economic and Social Council of Slovenia

Slovenia, Romania and the Czech Republic – Comparison of industrial transition models

FINDINGS

ANTECEDENTS

The European Economic and Social Committee's "Consultative Commission for Industrial Change" and the Economic and Social Council of Slovenia organized a public hearing in Slovenia, on 7 March 2008. The title of this event was "Slovenia, Romania and the CzechRepublic – Comparison of industrial transition models ".

This hearing was supposed to have a close look at the developmentof the economies – with particular attention to the industrial sectors – of Slovenia, Romania and the Czech Republic, taking also into consideration the specific points of departure of each country. How did these countries manage the transition to market economy, looking also at the drawbacks, tensions and problems experienced in the course of this transformation process? What successes and failures can they call their own, and what are the defining factors that have resulted in them? What can be learnt from each other to manage restructuring, industrial change and transition in general in a better manner? Are there any best practices, and if so, could they be exchanged, transferred from one country to another?

POLICY RECOMMENDATIONS FOR TRANSITION ECONOMICS

On the basis of the experience of Slovenia, Romania and the CzechRepublic, we can formulate the following observations, tendencies, that can be used as best practices or recommendations for policy making in other countries in transition:

The essential tool of economic transformation, of industrial policy is privatization. The best industrial policy is simply not to have a specific industrial policy, for privatization in itself is a very effective tool. Clear are the benefits of a slow, decentralized, distributional privatization, resulting in gradual transformation of social property, causing as little social tension as possible. But privatization has to be backed by an appropriate legal framework.

As for other restructuring issues, it's normally good to allow companies deal themselves with these problems (decentralized approach), without state intervention, without state aid. In Slovenia for example, company restructuring was basically done by managers, not by industrial policy. The role of local networks, regional strategies can be extremely important during transition. This decentralized approach can also be facilitated by intense contacts between companies and universities.

In the transformation process, the quality of institutions is crucial. Institutional quality is measured in three ways: quality of governance; condition for doing business and the degree of economic freedom. It is very important to improve the institutional quality as there is a clear positive correlation between the GDP and the quality of the institutional framework. The institutional quality is also important in combating corruption and it facilitates the cooperation of politicians and pressure groups, fosters the development of the civil society.

In the case of foreign direct investments (FDI), a case by case analysis is needed. FDI is beneficial if it is a Greenfield investment, but not necessarily when it's a pure acquisition. If it's a Greenfield investment then it can help to transfer technology and know-how; to contribute to enterprise development and restructuring; to contribute to international trade integration; to bolster competition and to support human capital development. FDIs can also play a crucial role in the economic survival of certain regions. But Eastern European countries (including non EU countries in Eastern Europe) have to be very careful, because there's a part of FDI that aims at acquisitions, especially in the finance, trade and communications sectors, where much technology transfer cannot be expected. Very often, the rate of return for this kind of foreign direct investors is around 10%, twice as high as what they earn in Western Europe. This makes it clear that it's not necessarily good to sell everything. These FDIs – by increasing imports more than the volume of exports – may also result in income account deficit, the outflow of the GDP (a widening gap between the GDP and the GNP), in strong monopolies (especially in the case of banks and retailers) forcing small emerging domestic firms out of business. Banks are often targets of FDIs, but Slovenia for example managed to keep them in domestic hands. So how to summarize our recommendation? Sell only what you really have to sell, and give preference to Greenfield foreign direct investments over pure acquisitions. Strive to get dedicated, strategic investors, as opposed to speculative investors (who are only interested in buying and selling).

The role of the industrial sector during transition is very important. In the case of Romania, one of the initial transition management mistakes was that several politicians did not consider the industrial sector important for economic transformation, for creating market mechanisms. This was a big mistake. Today even Germany realizes the importance of the industrial sector. The notions of deindustrialization and knowledge based society don't mean that the industrial sector should be neglected. These notions mean the modernization of industrial sectors. Industry, and even agricultural play a crucial role for the sustainability of a country's economy. The knowledge based society cannot entirely rely on the tertiary sector; the development of the industry is complementary to the development of the knowledge based society. The industrial sector can be an important engine of sustainable economic development, because it contributes to: productivity increase; enhanced skills and management capacity, improved production; creating an dynamic entrepreneurial business base; production of value added products and services; boosting the efficiency of RDI sector; sustainable development and social inclusion; effective public and private governance and improving regional economies.
Relations, cooperation between universities and industrial sectors are very important. If a certain industrial sector is neglected or even closed down, precious know-how may get lost. It's very important that the government recognizes the objective significance of a certain industrial sector. It's also important to mention that policies should concentrate on technological investments and transfers, investments in human resources, and not on providing aid.

"Retiring rather than firing":the importance of social dialogue is huge. Social dialogue was one of the crucial factors for the success of the transformation in Slovenia. Whenever a major business issue/problem arouse, trade unions were normally immediately informed about the problems (e.g. the need to reduce the number of workforce). Then the legal framework was thoroughly screened to search for the softest solutions (e.g. anticipated retirement), which were then executed in agreement with the unions. The main goal was to cause as little harm as possible to workers. Collective agreements have to be concluded as soon as possible.Slovenia is a showcase of the importance of social dialogue during privatization: all changes happened as a result of consensus of the social partners and several collective agreements were signed during the process.

Slovenia's example shows that a country's policy makers need to be very careful when receiving advice from outside (e.g. the US government, IMF or the Worldbank etc.). Policy makers need to be well aware of their own country's specificities when following external advice and creating the best economic policy mix: in Slovenia, neglecting the so called Washington agreement was more than useful.

It's clear that in the macroeconomic policy field gradualism (especially in the case of complicated economic/social structures) is better than shock therapy. The transition is a complex, long-term process requiring a certain “gestation” (preparation) which implies an effective mixture between shock and gradual therapy approaches, excluding unilateral solutions.

These findings can be extremely useful for countries where the transition is not yet completed or where it is an especially difficult process. The European Economic and Social Committee's "Consultative Commission for Industrial Change" will continue gathering best practices, and plans to share them in Eastern Europe, over the borders of the European Union, contributing thus in its consultative role to the EU's overall neighbourhood policy.

Our next evidence-gathering hearing will take place in Budapest, on 18 April 2008. Check out our website:

If you want to know more about the lectures, on the basis of which this summary was prepared, please read the "Notes of the hearing in Slovenia file" and consult the presentations on our website: