COMPETITIVENESS GROWTH INTHE RECESSION PERIOD

/COMPARATIVE ANALYSIS OF CROATIA AND SLOVENIA/

Mirjana Dragičević and Velibor Mačkić

University of Zagreb, Graduate School of Economics & Business, Croatia

ABSTRACT

Although, the global recession becomes the threat to future competitiveness growth in both developed and undeveloped countries throughout the globe, it could be the challenge, too. It could be the challenge, especially in the case of the countries that should re-invent their economic growth paths, because in the global competitiveness rankings they are lagging behind the countries with similar economic heritage and growth level. And that is the case of the two small neighbouring countries: Croatia and Slovenia. Both countries, twenty years ago, started different transition paths, and reached different competitiveness growth levels. Today, they are faced both with the recession and, at the same time, the problems of re-inventing their competitiveness growth in uncertain economic surrounding. The purpose of this paper is to carry out the deep comparative analysis of competitiveness growth in both countries and to research their strengths and weaknesses and their ability to cope with the recession and to re-invent their future competitiveness growth and economic development. The research will start with the short, but comprehensive, explanation of the economic heritage /before the transition/ and the analysis of the transition paths. The competitiveness analysis will be based on some competitiveness indicators, like GCI /global competitiveness index/, BCI /business competitiveness index/, on twelve «pillars» that could explain both indexes in detail, and, on SWOT analysis for both countries. SWOT analysis will be created by the authors. The proposals for future competitiveness growth, in the circumstances of the global recession, in both countries will be explained in the last part of the paper.

Key words: competitiveness, recession, transition paths, competitiveness diamond

  1. INTRODUCTION

Competitiveness is the driving force of the prosperity in any country. In the global economy, comprehensive approach should be made to make the country more competitive. According to the global competitiveness indicators, countries differ in various pillars that constitute the competitiveness. The post-transition countries are, generally, in the weaker position according to the competitiveness growth and, compared with the developed ones. Although, the competitiveness level was the prior question of the future development, and was the priority agenda to economic growth, in recent global recession period, the problems of surviving in the recession, or crisis, or, how to less painfully overcome the recession, became the priority academic and pragmatic questions in the developed and less developed countries. Paul Krugman recently said ( “Some people say that our economic problems are structural, with no quick cure available; but I believe that the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men.”. Following these thoughts, we tried to re-think the two processes: the competitiveness growth and the recession, and found out the possibility that recession could, not only be the threat, but the challenge, too. The purpose of this paper is to re-invent the possibility for the competitiveness growth in the risky and uncertain recession period in the two neighbouring post-transition countries: Croatia and Slovenia. In the first part of the paper, the economic heritage and different transition paths are shortly explained. The second part will be focused on the competitiveness analysis in both countries, based on the global competitiveness indicators, and followed by the SWOT analysis. At the end of the paper, some basic proposals for the future competitiveness growth, in the recession period, according to the two cases that are in the focus of the analysis, are recommended.

  1. THE ECONOMIC HERITAGE AND TRANSITION PATHWAYS

Before the dissolution, of former Yugoslavia Croatia and Slovenia had been the most developed industrial republics with a per capita GDP which was a third higher than the Yugoslav average. Unlike other countries in Central and Eastern Europe that had to operate behind «the iron curtain» and had command economies, Croatia and Slovenia as the republics within the Yugoslav confederation (from the Constitution of 1974) were moving along a so-called «mixed path». The path was marked by self-government and social ownership, but also by the market as a factor of allocating goods and services. Even back in 1989, Croatia and Slovenia had the highest liberalization index (0, 41 and 045) of all socialist CEE countries (EBRD, 2000).About 50% per cent of production was export oriented. The most prominent in Croatia was the complex of metal processing, shipbuilding, part of the food industry, the construction industry, and tourism that earned an average of $5-6 billion a year. In Slovenia the export oriented manufacturing were: ferrous metallurgy, lead and zinc smelting, electronics, truck production, electric power production, wood production, textiles and machinery tools.

According to everything that Croatia and Slovenia had stood for up 1990, it might be assumed that both countries could have been the models for sustainable transition to a full market economy and democratic societies.

2.1.The case of Croatia

The circumstances of transition in Croatia produced much more serious consequences for the Croatian economy that had been previously anticipated. The decision to create state, initiated a five-year war, which gave rise to the need to provide assistance for about one million displaced people and refugees, and was marked by huge direct destruction and indirect economic damage, particularly within the tourism sector. Croatia entered transition with the huge disadvantages: the loss of the former Yugoslav market which included 18 million people; large costs caused by war damage, amounting to about $50 billion /this was two and a half times the GDP of 2001/, and the lack of a system of international assistance and support, such as Phare etc.

Instead of exploiting the advantages of heritage, Croatia had engaged in a struggle to survive. A dramatic fall in production and the high demand of budgetary expenditure in the first years threw the economy into a widening budget deficit and increased money supply which led to growing inflation. In the period of 1990-93, GDP fell by 40 per cent, and the high inflation rate was 25 to 30 per cent. In such conditions government decided to reform the economy towards a free market economy. The macroeconomic stabilization program (1993) succeeded in fighting hyperinflation so that in 1994 the economy experienced the inflation rate of 3 per cent. Although the economy started to recover, and GDP growth rate was 5, 9 per cent in 1994, the economic transition was lagging behind.

The choice of the fast privatization model and the lack of transparency in its implementation allowed for the direct transfer of the ownership of firms based on political affiliation and nepotism that resulted in, "privatization robbery" The lack of public control and the sluggishness of the judicial system were characteristic for the first stage of the transition, when the government had the crucial influence on the new ownership structure through the Privatization Fund. As the consequence, the unemployment rate exceeded 23 per cent in 2001. (CRO STAT, 2001). FDI were low, too. The economic power was concentrated in the hands of privatization profit-seekers. Reforms were externally initiated (USAID, 2000, WB, 2002),because they were opposite to the governance praxis. In the year 1999 GDP achieved only 82 per cent of the GDP of 1990 level, with an unfavourable structure for quick economic recovery and the share of the foreign debt in the budget was about 50 per cent (CRO STAT, 2001). The consequences of the fast and non-transparent privatization and the predominant political government influence on the economyare present in Croatia still today. All the reformsare externally driven, mainly by the EU bodies. Since 2000, Croatia improved slowly with moderate but steady GDP growth, led by a rebound in tourism and credit driven consumer spending. Structural reforms are lagging due to the lack of strong support from politicians

2.2.The case of Slovenia

Contrary, in Slovenia, the whole transition was carried out gradually and in a transparent way. The whole economic and political situation was different to the situation in Croatia from the beginning of the transition due to the factsthat: first, Slovenia in its path to independence was not hit by the war, and, second, the government continued the economic strategies that it had started to create before the independence of the state. The social-democratic government started the transition following the strategy of re-inventing new economic advantages based on the inherited ones.

Slovenian government did not choose the fast, but gradual privatization model, based on the vouchers. Workers' councils in the firms were then empowered to allocate the remaining 40 percent to either firm insiders (through insider buy-outs) or outsiders (through a public tender). One of the main features of this process was the transition from workers' self-management rights over the "social" capital into majority insider-owned enterprises, through the redistribution of shares among managers and employees, and management-labour buy-outs.

Hence, Slovenia's privatization brought about two large groups of owners: inside owners (employees, including managers, former employees and their relatives) and outside owners (Pension and Restitution Funds, Privatization Investment Funds). As a consequence of the gradual privatization model, most inherited sectors and companies were restructured and many of them continued to export their product.

Slovenia also succeeded in building up the entire institutional infrastructure that is supporting the competitiveness growth of the companies and the whole state sector. In 2004, Slovenia became the EU member state.

  1. COMPARATIVE ANALYSIS OF SOME KEY MACROECONOMIC DATA

Croatia and Slovenia are small countries, that started its transition to a free market economy at almost the same starting position, but, according to the aforementioned different transition pathway, today they greatly differ in the level of economic development and the global competitive position, that could be seen from the data on GDP per capita level.

Some macroeconomic indicators demonstrate the huge differences in the economic development level of Croatia and Slovenia, which could be explained not only by the different (graduate or fast) privatization model, but, also, by the different economic development strategies (one, in Croatia based on the political influence on the whole process, and the other, in Slovenia, based on the comprehensive economic strategies that, from the beginning of the transition looked upon the social consequences of the economic transformation.)

One of the basic indicators is the level of GDP per capita. Slovenian GDP per capita is more than two times bigger than it is in Croatia.

Figure 1GDP per capita: Croatia and Slovenia (1989 – 2007)

Source: Authors calculation according to the EBRD data series

The huge difference in the unemployment rates, is significant during the whole period of the transition, and, it is obvious from the following figure (Figure 2.) still exists. High unemployment rates are present constantly in Croatia and they do not create only economic but huge social costs too.

In Slovenia, the gross external debt has increased from 4.3 mil € in 1995 to 19.6 mil € in 2005. The percentage rate related to GDP jumped over the 70% mark in 2005. During the same time period Croatia also followed the trend of increasing external debt to GDP percentage that reached 70% (22.9 mil €) in 2004. In the last couple of years the trend continued in the case of Slovenia and reached 105,3% (39.09 mil €) in 2008. Since 2005 Croatia started borrowing more intensely on the domestic market thus slowed down the increasing external debt to GDP ratio to 82,6% (39.1 mil €) in 2008 ( ). According to the World Bank classification (external debt / GDP > 80%) both countries are considered highly indebted.

  1. COMPARATIVE ANALYSIS OF THE GLOBAL COMPETITIVE POSITION

Evaluation of competitiveness became an important instrument for balancing the development process of the economy.The world economy is not a zero-sum game and many states can improve their prosperity if they can improve their productivity. The challenge for any economy is to create the conditions in which companies and employees throughout the economy can upgrade their productivity (Porter, 2008:44.) Theory and empirical evidence suggestthat there is a need for comprehensive approach to competitiveness measurement. While measuring competitiveness, and comparing its competitiveness with other countries with similar economic characteristics, each country could be faced with its weaknesses and strengths.

4.1.Global Competitiveness Indexes

Both, Croatia and Slovenia are included in the in international competitiveness’s yearbooks, such as the The Global Competitiveness Report (GCR). This index is a combination of data obtained from secondary sources (quantitative weight) and through primary survey (survey weight) on various macro- and micro-economic dimensions of the economy of a country or pillars. Porter (1990, 2008), introduced the elements of the New GCI that will include social infrastructure and political institutions.

In the following table we can notice the differences not only in overall ranking position of Croatia and Slovenia /where Croatia is lagging behind Slovenia/, but, especially dealing with some pillars that could illustrate us the vulnerable or weak sides, or some strengths of the competitiveness structure in both countries.

Table 2 Global Competitiveness IndexSource: WEF, 2008:.142 and 300.

The Croatia lags behind Slovenia in overall GDI ranking for 19 ranks 2008-2009, 18 ranks 2007-2008 and 16 ranks 2006-2007. The gap in competitiveness ranking between Croatia and Slovenia from year to year is widening. Considering pillars, it could be noticed that the weakest pillars in Croatia are the goods market efficiency /76/, institutions /74/ and business sophistication //72/ and in Slovenia: market size /70/, labour market efficiency /61/ and goods market efficiency /50/. The ranking in the forth pillar: Health and primary education, in fifth pillar: Higher education and training, and in ninth: Technological readiness, is much better than the overall ranking in both countries. In Slovenia, the pillars that demonstrate the strengths in competitiveness growth are also obvious on ranking position dealing with: Macroeconomic stability, Innovation and sophistication factors, Business sophistication and Innovations.

If the most problematic factors for doing business are considered (WEF, 2008:142), then it could be noticed that in Croatia these factors are: tax regulations, inefficient government bureaucracy, high tax rates, corruption, policy instability and crime and theft.In Slovenia, these factors are: inflation, tax regulation and access to financing.

Although, these rankings should be important indicators to policy makers, contrary to Slovenes Ministryof economy various initiatives on developing competitiveness strategies, and many other non-governmental institutions that both on research and empirical level foster competitiveness growth, in Croatia, there is only one non-governmental organization: “National council for competitiveness building”, that is focused on the Croatian competitiveness growth, but still, this organization has no influence on policy makers.

4.2.SWOT analysis

SWOT analysis could be an important tool for policy creation. In this, sense, based on the research or the different recent analysis of the competitive position of Croatia and Slovenia(WEF, 2008, WB, 2005, 2008),and some expert interviews, the SWOT analysis of both countries demonstrate their specific strengths, weaknesses, opportunities and threats.

Table 3:SWOT analysis of Croatia:

The main weaknesses of Croatian economy, especially in the light of the current economic crises,are in the high burden of public and foreign debt, and on the political dominance over economy. The unreformed public sector is the main barrier to further competitiveness growth. The governments efficiency is very low and all the reforms are driven by the external bodies (EU, mainly).

In Slovenia, SWOT analysis demonstrates different situation.

Table: SWOT analysis: Slovenia

Despite structural changes, the Slovenian economy remains disproportionately dependent on traditional industries The relatively low share of labour and capital deployed in industries considered to be the twenty-first-century vehicle of economic growth – computer and office equipment, communication equipment, semiconductors and biotechnology – hinders long-term development and weakens the long-term competitive prospects for the economy. Thus, Slovenia's industrial productivity lags far behind most advanced economies and, the export competitiveness of its manufacturers remains low. In 1998, gross value-added per Slovenian employee remained nearly three times lower than in comparable industries in the EU countries (Petrin, et al., 2002).

After European enlargement, Slovenia has increased the location attractiveness for business sector and also improved the institutional competitiveness. Harmonization with EU legislation has improved the institutions and the legal system. On the other side, Croatia stayed outside the first enlargement process, it has to work much more on its less competitive position in comparison to Slovenia.

  1. COMPETITIVNESS GROWTH FACED WITH THE GLOBAL RECESSION

Croatia and Slovenia have high external debt-to-GDP ratios, well above those in other emerging market regions. Given today’s global risk aversion, sharply slowing economic growth, and Croatia and Slovenia’s high external vulnerability indicators, these high external debt-to-GDP ratios seem unsustainable.