Slovenia’s Gradualist Transition

Posted December 13, 2013

Categories: Blog, Eastern Europe, Featured, Uncategorized

When it came to the transition from Communism to capitalism, Poland led the way with its rapid, “shock therapy” approach. This “overnight” strategy was designed to reduce inflation, stabilize the economy, and eliminate opportunities for insiders to make money by taking advantage of large differences between state-subsidized and free-market prices.

On the other end of the transition spectrum was Slovenia. It took a more cautious approach to system change. One reason was that the country already had to face the shock of Yugoslavia’s disintegration. Another reason was that Slovenia was already rather well off in comparison to its East-Central European neighbors. Finally, a politically diverse group managed the transition without trying to dispossess the former elite.

This gradualist approach was marked by a concern that rapid change would destabilize the economy and throw large segments of the population into unemployment and penury. It didn’t emphasize rapid privatization. Since many firms still operated under a self-management system, the workers in some of these enterprises became part owners. Also, the state didn’t immediately privatize banks, insurance companies, and other major elements of the financial infrastructure. And Slovenia initially went with a flexible exchange rate – rather than a fixed exchange rate – in part to ensure that Slovenian exports remained competitive.

There is considerable controversy over whether the gradualist approach was the better strategy. “The country has achieved one of the highest and least volatile growth rates among the current group of countries in line for EU membership, concluded a 2004 World Bank report. “Moreover, after the initial stabilization, its stable and reasonably high growth rate was achieved without any major macroeconomic imbalances during the 1990s, and much the same can be said regarding social and political developments.”

More laissez-faire economists, however, complain of a “rigid labor market,” low productivity, overly generous government benefits, and continued reliance of state ownership in the banking sector. Indeed, under pressure from the European Union, Slovenia has more recently introduced budget cuts and tax increases to balance its budget as well as announcing the privatization of major companies including the second largest bank, Slovenian Telekom, and Adria airlines.

This August, I talked with one of the major architects of Slovenia’s economic transition, Joze Mencinger. For one year, between May 1990 and May 1991, he served as minister of economy in what was then still a republic in the northwest corner of Yugoslavia. He helped prepare Slovenia to have a fully functioning economy once the government declared its independence (in June 1991).

The government adopted some but not all of Mencinger’s recommendations. Take the issue of privatization. “I preferred that we count on insiders — managers and workers – but most politicians didn’t much appreciate this approach,” he told me. “They said we should forget about self-management and the idea of social property, which I nonetheless believe is a just arrangement in society. I believed, and to some extent I still believe, that the present capitalism, what I call casino capitalism, will not last.”

The other approach to privatization was the “big bang” of distributing free vouchers to Slovenia’s two million inhabitants. “The law at the end of 1992 was a compromise between two approaches,” Mencinger recalls. “It was decentralized. Companies chose the way to privatize because they were very different. Some had little capital and many workers; some, like electric power stations, had a lot of capital but few workers. I don’t know what would have happened if my way was chosen. Now I realize that the chosen pattern of the privatization was not a good solution for Slovenia because of this creation of two million capitalists. However, the system more or less worked, and there was gradual concentration of ownership, until 2004.”

We talked about the relationship between economic reform and independence, the influence of the European Union, the particular brand of self-management practiced in Slovenia, and the casino capitalism years that overtook the country a decade ago.


The Interview


Do you remember where you were and what you were thinking when you heard about the fall of the Berlin Wall?


I was here in Slovenia. At that time, I’m not sure whether we’d already formed a government. Nevertheless, there were new parties emerging. I was a founding member of the Social Democratic Union. At that time, we could not call it a party. When we established this union it was only 16 members.

I’d proclaimed myself a social democrat ever since I was in high school. I was working in West Germany during the summer months, and I particularly admired people in Hamburg though I was working in Bavaria as well. I was a construction worker for those three months. At that time, I noticed that workers were very eager to discuss politics.

So, I believed in social democracy, and I helped to establish the Social Democratic party with a trade union leader at the Litostroj heavy machinery complex. I left the party when I resigned as minister because the party in a way supported the opposite view on privatization than mine. I believed that in the existing circumstances we should use  a continuation of self-management as a provisional solution, meaning  that the insiders would take over. I namely believed that the creation of a responsible owner was not an easy thing and  I thought that the people who were most eager and responsible for the fate of the companies would be the insiders. But there was a dispute in the government over this issue, and I resigned in 1991.

Whether Slovenian independence was related to the fall of the Berlin Wall is hard to say. Everything went wrong in Yugoslavia since 1979-1980 when Edvard Kardelj and then Tito died and there were no new leaders. These two men always “knew what to do.” During this period, because the situation got worse and worse, there was ten years of stagnation in Yugoslavia that was more and more accompanied by what I called the Yugoslav syndrome, in which everyone felt exploited by everyone else in the country. This was very characteristic of the period. This was also one of the reasons for the independence of Slovenia.


Looking back, how would you evaluate Slovenia’s separation from Yugoslavia?


As far as independence is concerned, I’ve always considered it an emergency exit. I’m not a nationalist, so I would have preferred to stay inside Yugoslavia if this had been possible. But at some point, it became clear that we could not stay in Yugoslavia, because of the conflict between Serbs and Croats, who were talking about Ustashe and Chetniks and the consequences of World War II.

I realized that it would be impossible to stay in Yugoslavia in October 1990. But this was more or less for economic reasons. If someone wanted to keep Yugoslavia together, it could have been done before October 1990. By that point, it was too late. At that time, Yugoslav Prime Minister Ante Markovic was the only leader eager to keep Yugoslavia together. I liked him very much, I must admit. I liked his approach to the changes. But he was a very lousy politician. I trusted him. Usually, I went to the airport with him whenever he was here in Ljubljana. I always tried to convince him to change Yugoslavia from a federation into a kind of confederation. But he always said, “Joze, don’t worry, I will get money from the Americans, and we will stay together.” But by that time, money was no longer important. Nationalism was prevailing. No one was thinking about money.


When did you enter the government in Slovenia?


I entered the government in spring 1990. The reason I became deputy prime minister was very simple. I was considered a dissident under the former regime even though I never felt like a dissident. I was never in jail. Okay, I couldn’t publish everything that I wanted. But due to some of the published works during this period, I was considered a kind of dissident. After the elections in April 1990 I was approached by the candidate for Slovenian prime minister, Lojze Peterle, to become a member of the government. I was uncertain for a week. But then I accepted under one condition, that my friend Marko Kranjec becomes financial minister. At that time, people were not very eager to become ministers.  After some consultations Peterle agreed and said, “Yes, Kranjec can become finance minister.”

So I accepted the post responsible for economy and relations to Yugoslavia. The government established in April 1991 was a government full of political amateurs. All of us were more or less amateurs. There was immediately a discussion of Slovenian independence. Because of economic reasons and because it was clear that Yugoslavia would not stay together, we wanted to avoid the turmoil that would happen in the country.

This first free elected government in Slovenia had three main things to do economically. The first was to survive the depression in Yugoslavia. The second was to establish a new capitalist economic order. The third was to prepare everything for the independence of Slovenia. So we immediately started to do all these three things, though often in a very confused way.

If we are talking about preparing for independence, already in June 1990 we were discussing how to create a monetary system, and already in October 1990 we printed provisional notes for an independent country. This was all done without knowing what would happen because the political situation was unclear. We had problems with overeager politicians, particularly in parliament, who were pushing for independence. I was for example under pressure to introduce a Slovenian currency. Although we had actually printed notes in October 1990, I couldn’t just say in parliament that everything was ready. After all, we were still in Yugoslavia. Let me admit that I still thought that we could have our own monetary system within the country of Yugoslavia.

In a sense, we also established a monetary system indirectly. Namely we announced that there was no black market for foreign exchange in Slovenia. So, many people from Croatia and Bosnia, particularly those working abroad, came to Ljubljana or Slovenia to sell their foreign currency because in Ljubljana they could get 13 dinars to the German mark while the fixed exchange rate was only 7. We also did that for companies. Thus, we introduced a flexible exchange rate system within the fixed exchange rate system.  This is one example of how we became partly independent as far as economics was concerned.

What was extremely important at that time was the atmosphere in the county. At that time, a minister was allowed to make mistakes. It was considered normal. The economic situation was bad. There was a drop in GDP of more than 10 percent in 1991-92. Unemployment went up to 147,000 people, which is higher than now, even though only people in bankrupt companies lost jobs. Many more retired, which was a problem. For instance, if you retired at that time, your pension was 20 percent higher than your salary as your pension depended on what you earned before. Overnight the government could change this rule and say that you would instead get only 85 percent of your salary. Right now that would be impossible. But at that time, it was possible because of the general atmosphere in the country. That’s the major difference between the crisis now and the crisis before.

Of course, we moved relatively quickly. Particularly, after January 1991 when there was the so-called break in the monetary system by the Serbian authorities. As the pace of change in Slovenia was accelerating we began preparing all the laws for an independent country. These laws were all brought to parliament in June 1991 when we proclaimed independence at the end of that month.


Can you talk about the dispute over privatization that led to your resignation?


Before those laws were brought to parliament in June 1991, I’d already resigned – over the privatization issue. As I said before, I preferred that we count on insiders — managers and workers – but most politicians didn’t much appreciate this approach. They said we should forget about self-management and the idea of social property, which I nonetheless believe is a just arrangement in society. I believed, and to some extent I still believe, that the present capitalism, what I call casino capitalism, will not last. The prime minister in this period invited Jeffrey Sachs, who was very neo-liberal at that time (he has since changed completely and writes very different things now). The prime minister and I had a quarrel over privatization. At some point in April 1991, I was out of the country in Luxembourg. When I came back I was told that Sachs was in parliament talking to parliament members. That same night I resigned. I considered it unfair of the prime minister to bring him to parliament when I was absent. I resigned from politics in 1991. Whether this was a proper move or not, I don’t know. I think it was. It was not a time to have a dispute within the government, not when everything was prepared for the independence of Slovenia.

We were lucky as far as independence is concerned. I would say that 85 percent was luck and 15 percent was our ability to manage things. Slovenia was, from a technical standpoint, extremely well prepared for independence. This was partly because of circumstances. We were by far the richest part of both Yugoslavia and Eastern Europe. This was an open country. We could go shopping for what we wanted on a daily basis. The Communist Party was extremely liberal in the last decade. So I would not blame the Communist Party for doing anything wrong during that time. As far as technical things are concerned, we had an electricity grid within Slovenia with some connections to other parts of Yugoslavia. The borders were well defined. For the railways, we had to change engines at the Croatian border. We were a very independent country within Yugoslavia. Our trade with other republics was like foreign trade. It was a unique situation. And when we made our proclamation of independence, we were prepared for almost everything. For example, we knew how many railway cars would stay outside at the time of the proclamation. The only thing we could not control in advance was air traffic control, which was controlled by the Yugoslav Army (JNA).

We were very lucky also with our relations to Croatia. The best thing was that Croatia did not help us when the JNA went to the Slovenian borders. If Croatia had helped us, the JNA wouldn’t have been able to get out. We also had this Brioni Agreement in July 1991, which I consider a very important agreement, by which we postponed independence for three months to see what would happen in Yugoslavia. Nothing happened. So, on October 8, 1991, we introduced our new currency and actually became independent.

The government had 17 different groups working to prepare for independence, which was led by Igor Bavcar, who is now one of the country’s tycoons. He managed this process quite well. He was much more able to do that than the prime minister,  Peterle, who was however a very democratic leader. But we did not consider him very seriously. He became prime minister because the Christian Democratic Party got the majority in the opposition, and there was a decision in advance that someone from the party with the relative majority would become prime minister.

There were no quarrels within the government on ideological grounds. There were even some former Communists in the government. This was an extremely nonpolitical government. I was member of the Social Democratic Party, and I was invited because there was a very small but strong party, the Slovenian Democratic Union, which included members like France Bucar, who was chairman of parliament, as well as Igor Bavcar, Janez Jansa, and Dimitrij Rupel, three strong ministers. This party had much a bigger influence than its share of votes. Therefore it was thought that some other parties should have people in the government, like social democrats.

As far as privatization is concerned, I very much opposed the free distribution of vouchers to everyone and the creation of different funds. I considered that free distribution of vouchers would create two million capitalists, but they would not be proper owners of the companies. They would be owners of the assets but not of the company. In other words, they would not care for the company. They would immediately replace productive assets with nonproductive assets to buy a car and so on. Instead, I preferred to rely on the existing management and the existing people in the company. Of course, in such a case, you could not have free distribution of vouchers because people in the public sector, like teachers, would not get anything. Therefore I considered that everyone should pay something. Workers would give up an increase of wages and instead get shares. Whether this was the right solution I don’t know. It was probably a good solution for relatively small companies where people were very much linked, professionally and emotionally, to their companies. This was a result of circumstances and decisions in the past. Namely, Slovenia was in a special situation because in the 1970s there was decision  that industry should go to where people were rather than people going to where industry was. This meant that there was a dispersion of industry throughout the country. Most workers were part-time farmers because we had a landholding limit of 10 hectares. This created small farmers who could not survive on farming alone. So, they got jobs in these companies. They had a feeling of ownership over these companies. When I went to the countryside and talked about privatization, the answer of people was: “Why are you talking about such nonsense. This is nationalization not privatization. These companies belong to us!” Before that, I thought self-management was just the invention of Kardelj. But it was very much alive in Slovenia because of these specific circumstances, namely the dispersion of industry and part-time farmers.

But then I resigned.  Two years of quarrels over what to do followed. My idea was that everyone should pay something to get ownership, mainly in giving up an increase in wages. The privatization should be decentralized so that companies would decide how to privatize. And it should be gradual, lasting for some years. On the other side, there was the idea of Jeffrey Sachs that it should be done overnight and connected to Slovenian independence. This was the so-called shock therapy. We also wanted to disconnect privatization and independence.

The law at the end of 1992 was a compromise between two approaches. It was decentralized. Companies chose the way to privatize because they were very different. Some had little capital and many workers, some, like electric power stations, had a lot of capital but few workers. I don’t know what would have happened if my way was chosen. Now I realize that the chosen pattern of the privatization was not a good solution for Slovenia because of this creation of two million capitalists. However, the system more or less worked, and there was gradual concentration of ownership, until 2004.

But then in 2005, the so-called gambling period began and lasted for three years. Slovenia lost all its advantages in just three years. At the end of 2005, the net foreign debt was zero; by the end of 2008, it was 10 billion euros. Everyone believed that you could get rich through financial products. People were buying shares and bonds. Banks were borrowing money abroad and fulfilling the wishes of the people. After entering the EU and then the monetary union, Slovenia suddenly had access to a lot of cheap money abroad. This created the current situation. Slovenia could not avoid the crisis in Europe, because it came through the real estate sector. We did the same things as other countries in Europe. For example, the major problems are related to the construction sector. Suddenly, everyone wanted to be an investor in real estate. So many buildings went up at that time. It was an expansion similar to Spain and Ireland. In fact, in relative figures, the real estate bubble was even worse here than in Spain. Now, we blame tycoons who wanted to take over companies by borrowing money and paying four times the normal price for shares. Everything was done on credit. When the crisis hit, there was an enormous drop in virtual wealth, with the credits to be repaid. We are still in this situation.

What is different now from 1991 is the atmosphere in the country. I cannot understand journalists and newspapers who are extremely happy if something bad happens to the country. They say that the Troika should come from Europe to resolve our problems. And we are offered solutions similar to the Baltic countries, which I don’t like very much. I admire Tallinn, but if you go 10 or 20 kilometers outside Tallinn, you see that Estonia is not a successful country.

They say we should reduce the public sector to 30 percent. Sure, you can do this. But then you would introduce private education, private health care and everything else that I don’t like in a society. I don’t know what the outcome will be. We have a relatively weak government right now, and I don’t like what they are saying. But this is the government that we do have. In my view they are doing everything that’s ordered by the European Commission, which I consider the most harmful entity in the EU. Slovenian problems will not be solved as long as the problems in Europe go unsolved. These current austerity measures don’t lead anywhere. I’m a Keynesian. I know that there were problems in Greece. But Europe was not solving the problems in Greece — just the problems of German and French banks. They would like to do the same thing here. The European Commission can’t solve problems in the EU, so they are trying to rule over small countries with solutions that are not solutions.

At the same time I understand the government’s situation, and I don’t see any serious replacement for it. There is a group of new movements, but they are very naïve. You cannot have democracy in the streets. You can’t rule the country in the streets. I’m not very happy with the parliament. I never expected that there would be the kind of party-tocracy that we have now.


One of the criticisms of the kind of insider privatization you described was that it would make the workers of the companies responsible for the failure of the companies if they went bankrupt. By distributing the shares more generally, it distributes the risk.


I agree with this criticism. But here we should take into account the special circumstances we had because of self-management and social property. Self-management was still very much alive when it was abolished. Workers were willing to go without wages for two or three months just to keep the company alive. Of course they could afford to do that because they were part-time farmers. Our transition was relatively soft because of these part-time farmers, who are a very stable part of society. Even when they are fired, they still have five cows at home so they can survive. It is very different for workers fired in the city.

I was on the supervisory board in one company based on the idea of self-management. The majority owners were workers. And there were two funds that were co-owners. According to the privatization code, 10 percent of ownership went to the restitution fund, 10 percent went to the pension fund, and 20 percent went to a special development fund. The rest was given to insiders. If you were a worker in a  small company, you could bring your voucher to the company and become an owner. For large companies, the amount of capital was too large, so that insiders couldn’t get a majority with the voucher system. This particular company produced meters that monitored electricity use. It was a relatively well-developed company. It was even a multinational since it had some branches in India, though this was to some extent a mistake. When the company encountered troubles, the two funds that were owners wanted to sell the company. These owners were conducting talks with the banks that also wanted to sell the company, and the banks and the two owners were against the third owner, the insiders. In the end, even the insiders were eager to sell to get their shares back. I was a president of the supervisory board, and I, as the president, and the general manager were, in the end, the only people opposing the sale of company. It was then sold to an Egyptian company, and it is still functioning.

So, here I got a little disappointed with the insider approach. But I did not understand this at the time. As long as you were an active worker, you were eager to remain an owner. But when you retired and had some economic problems, you immediately wanted to sell your shares. So, this was a mixed solution. We still have companies mainly owned by insiders. One is Krka, a very successful pharmaceutical company. In reality, everything depends on the managers. This is the same in a socialist or in a capitalist company. If you have many shareholders, you know who is making decisions and in what way.

I trusted the so-called “red managers” at that time, who were usually the members of the Communist Party. But these were people who had been with companies for 30-40 years, and they actually felt that the company belonged to them. Although they were formally not owners, they were very tied to the company. In this way, they were similar to the part-time workers who also had an emotional connection to their companies. We had many very able managers at that time, and we should have relied on them. This was not very popular with the government and new political elite, however, which complained that they were Communists. Indeed, these managers didn’t believe in Communism. Before the changes, there were probably only five Communists in the country who believed in Communism. The rest were just members without ideology, including the general secretary of the Party. Indeed, people in Eastern Europe, including members of the Party, didn’t believe in Communism. There were probably more people in America who believed in Communism. These managers were simply members. Membership had some advantages. You could only get so far without being a member of the Party. I could become a full professor without being a member even if I was considered a kind of dissident. But you couldn’t become a minister in the government. As for being a general manager of an enterprise, this depended on local conditions. In some towns the Communist Party secretaries were strong while in some other towns they were very weak. I came from Jesenice, where there was a big iron mill at that time and where it was very clear that the general manager of this iron mill, who was not a Party member, was much more important than any party secretary.

In the 1980s, we were more or less a normal country. Nobody was persecuted. You could write what you wanted even though sometimes they would not publish it. I would even say that we were very lucky to have Milan Kucan as Party secretary and then president of Slovenia. To some extent this combination of anticommunist government and former elite was a good combination for transition, and Kucan was the most useful man in Slovenia’s transition from Communist regime to a democratic society. Also, it was very good that he was president during the war for independence. Some people are trigger-happy, and he was more or less an able politician who would slow everything down.

The war here was very short. The JNA actually didn’t know what to do. The idea that they were occupying Slovenia is nonsense. We were part of Yugoslavia. They went from their barracks to the borders. It was a dispute over customs duties, not really a war of independence. If I’d been deputy prime minister at that time, there wouldn’t have been a conflict over customs duties. My successor went to Belgrade to sign an agreement with Ante Markovic to send customs duties to Belgrade. And then he didn’t do that. I don’t know whose decision it was to send troops to the border. I always wanted to ask Markovic if he was the one who did that. Some years ago I met him at the airport in Sarajevo, but he was unfortunately already leaving. I asked Kucan if he thought Markovic sent troops, but he doesn’t know or isn’t telling. But he said that he thinks not because he called Markovic at 4 in the morning and Markovic sounded so surprised that troops had been sent to the borders.

The war was very short and uneven. These guys in the JNA went to the borders in tanks. It was the end of June and very hot. The troops were usually without ammunition and water. In three days they would have given up. They were not eager to stay in Slovenia. I still remember the negotiations with Milosoveic. Bučar, Kucan, another member of the presidency, and I went to Belgrade. I was not important in those negotiations, because contrary to Milosevic, who wanted to talk economic issues, our two leaders would not talk about economics, just politics. I still remember Milosevic saying, “You can go if you want to. We will not object. We will settle some economic accounts, but you should admit the right of Serbs to live in one country.” Of course we did that.

In this way, we betrayed Croatia, which had a Serb minority. We stopped off in Zagreb. Croatian President Franjo Tujdman was waiting for us, and he was very angry. Croatians had an even more inexperienced government than we had – with the exception of Tudjman, who was in my view a strange man. They were similar in a way, Milosevic and Tudjman, and I must say that I preferred Milosevic. Tudjman was really nationalist, while Milosevic was only using nationalism. He was a banker, and he miscalculated: when you open the bottle of nationalism, you can’t stop it up again.

At the time, there was a lot of discussion about how the two governments, Croatia and Slovenia, would work together. We usually sent all the laws we created to Croatia. We had various meetings. I still remember one meeting close to Novo Mesto in Slovenia when the two governments came together, including both presidents. I was late because I didn’t like to go with the official car, so I was driving myself. I saw a man in white clothes. So, I asked a policeman, “What is he doing here?” He told me, “He is tasting food for President Tudjman.” That’s when I thought monetary union would not work between Croatia and Slovenia.

We were lucky with our president, and they were not so lucky with their president. Kucan was very close to the people. He would come to the office, driving himself in the morning. He would walk around the city without any problem. Tujdman was the other extreme. He wanted to become a kind of Tito. So we were very lucky when Croatia decided not to help us. Milosevic was eager to get rid of us. We were considered the schwabe [Swabians or Germans] of Yugoslavia. But there was a kind of admiration between Slovenes and Serbs. We like Serbs, and Serbs like us. Perhaps this is due to the fact that you like the neighbor of your neighbor. Our relations with Serbia were better than our relations with Croatia. The two nations were very friendly until the point when we supported Albanian miners during their strike in Kosovo in 1989.


You published an article in 1995 in which you made two points about privatization. You said that the ownership question was not so important as the management of the firm. And you said that in some cases self-management did continue. From the early 1990s to the beginning of casino capitalism in 2004-5, some form of self-management was preserved.


There was no doubt that there was some concentration of ownership. Some people immediately sold their vouchers. It’s said that I should be blamed for the selling of vouchers because I announced on on TV that they were worthless. They weren’t entirely worthless, but for 60 percent of the people they were worthless. They’d bring their vouchers to the funds and get nothing.

That included the funds established by the Catholic Church, Zvon 1 and 2, which had 60,000 shareholders. The Church also wanted to become capitalist. During this “gambling period” of casino capitalism, the Church wanted to become a rich player. During this period you couldn’t figure out from the name of the company what it was actually doing. Pivovarna Lasko – you’d think this was a brewery because of its name, but that was actually a small part of the business. It was mainly a financial business. It was the same with the Church funds. I said at the time that they should care for souls not shares. The Church made a basic mistake at the very beginning. It had a lot of political influence, but then it lost practically everything when we became independent because it was too eager to talk about restitution of property. They got some forests back at this time, which I always considered a bad idea.

I still believe that ownership by insiders is the right solution. Of course it won’t work for large companies, and I don’t think this is the solution for the world in the long run. We need to find another solution – for the whole world, not just Slovenia. I hoped that the crisis would make some difference, but unfortunately it did not. Particularly here in Europe, they blame the public sector for everything when they introduced austerity measures. But banks were offering money without asking questions, and no one is blaming the banks for what they did at the time. The bankers should have known what was going on, much more than the borrowers. It is true that Slovenians banks were often giving credits to political supporters or friends. It’s also true that the banks here were being supplied with very cheap money. But also regulators were trying to push the banks to be as active as possible. There was an enormous growth of credits in Slovenia after entry into monetary union: up to a 70 percent increase in credits per year. Of course, banks were eager to get cheap credit on one side and loan that money on the other.

Take the case of Igor Bavcar, the head of Istrabenz. He was fighting to take over Petrol company, a gasoline distribution company. This was a very stable company because there was always an inflow of cash. The share price for Petrol was at 250 for many years. In that one year it went up to 1,000. This was all bought on credit. Then there was the collapse, and the share price went to 160. The credits were still there, but the value of property disappeared. And this was just one case. It was not considered criminal activity at the time. In fact, these guys were considered very successful businessmen.

There was, for example, a man who was jailed for six and a half years. He was talking on TV about how the banks trusted him without any collateral. This was seen by the whole country! At the time, he was proclaimed one of the best businessmen in the country, and now he’s in jail for same activity. And you were considered crazy if you said something against it. I consider myself a physiocrat. I don’t like the financial sector very much. When I said something against this speculation, they said, “He doesn’t understand anything, he’s an old man and a Communist.”

In 2008, the government could still intervene to improve the situation in these companies. But instead of nationalizing the managers of the companies, they were destroying the companies. The companies were in bad shape when all the credits stopped, and there was a politically popular fight against the tycoons. These were mistakes done by the government after the Janez Jansa government, which actually created all this destruction. Nobody knew at that time that this would happen. Common people were borrowing money and buying shares all around the world. You couldn’t convince people that this wouldn’t last forever. It wasn’t just the government. It was the general atmosphere.


As you look back at the Slovenian situation, which many people held up as a model, are there other aspects of economic reform that could have been done better?


As far as macroeconomic stabilization is concerned, it was done in the right way. The economic policy was taken over by the central bank, where I was a member of the governing board along with three or four friends, all of us gradualists. Characteristic of that gradualist approach was the introduction of a flexible exchange rate, which was not very popular with the International Monetary Fund. The IMF wanted a fixed exchange rate system. I still don’t understand why they were pushing for that. There were many reasons for having a flexible rate. For instance, our foreign exchange reserves were exactly zero. We were a new country with a new currency, so you couldn’t say what the equilibrium exchange rate was. The inflation rate when we introduced our own currency was 60 percent a month. So you couldn’t fix the exchange rate. We calculated the exchange rate at 32 dinars or tolars to the German mark, which at that time was like the euro is now. Immediately the rate went up to 48. So, we didn’t know the situation.

I must admit a mistaken judgment concerning the foreign exchange market. When I was deputy prime minister, my major concern related to independence was the lack of foreign exchange. Then, for several reasons, suddenly we had an abundance of foreign exchange. There was the privatization of apartments. People were bringing in foreign exchange from the rest of Yugoslavia. There was an outflow of dinars and an inflow of foreign exchange. Much of this was kept in foreign banks – German, Italian — so we didn’t know the situation. Here’s an example. We prepared 16 billion new Tolar notes to be exchanged for dinars. But actually we only used 8.5 billion. Meanwhile the central bank of Yugoslavia claimed that we owed them 32 billion bills. What was the mistake? A lot of cash went into circulation in Slovenia for two reasons: because of workers in Slovenia with families living elsewhere like Bosnia or Croatia and because most tourists entered Slovenia and bought dinars but spent them elsewhere. So, we underestimated how much foreign exchange the Slovenian population bought.

I was very worried about the shortage of foreign exchange when I was minister. It was my major concern. When I was at the national bank for six years, we had problems with the abundance of foreign currency. We did not want our currency to be too strong. We wanted a weak currency to encourage exports. This was the reason why we were buying up foreign currency coming into country and “sterilizing” it by issuing bonds. This was a costly manipulation because we had to pay something. But the most important issue was to prevent the appreciation of the domestic currency. This is considered a pro-inflationary policy, but inflation went down regardless. Because of increased competition, we had to open the borders and more and more goods came in and inflation gradually disappeared. It was high at first, but it went down gradually. We wanted to accomplish this over many years. We didn’t want shock therapy.

This macroeconomic stabilization, which is considered the second pillar of the transition, was accomplished in this typical gradualist way, and it went quite well until 2004. Okay, maybe because I was behind it, that’s why I say this. But I think it was a proper policy for the country. We didn’t have an economic crisis until 2008. But then we created a crisis in three years.

We could afford this approach in Slovenia. Some other Eastern European countries couldn’t afford this. We had a functioning banking system, which had already been established within Yugoslavia. There was a clear distinction between the central bank and the banking system, though we had two banks in rehabilitation – Ljublanska and Mariborska. Why were they nationalized when everything was privatized? These two banks had many bad loans because they were lending money to the rest of Yugoslavia. Suddenly there was the separation, and during the transition period many companies collapsed. So, the amount of bad loans in the banks was extremely high. The only solution was to take them over. We had to establish a special agency for the rehabilitation of the two banks. The banks, which had negative capital, were actually nationalized as part of this rehabilitation. The rehabilitation started in 1993 and was over by 1997 when they could be sold. But they weren’t sold and remained in state ownership. There was not enough capital at home, and we were not eager to sell the banks to foreigners.

I’m blamed for this as well, for not liking foreign direct investment (FDI), even though I had no power at that time. I was just a writer. I’d gone back to being a professor. My views were partly ideological and partly practical. I thought that if we sell everything to foreigners, why have independence in the first place?  I want to have a say within a country and not have everything decided by foreign multinationals.

The other reason is much more practical. Foreigners come here, of course, for profits. After a while, if you sell all the companies to foreigners, there will be an enormous outflow of capital. This is the difference between Gross Domestic Product (what is produced in the country) and Gross National Product (what belongs to the population). You can see this difference most clearly in Ireland where GNP is 20 percent lower than GDP. If you sell everything cheaply, after some time there will be an outflow of GDP because of foreign ownership. This actually happened during the crisis. If you look at flows of capital in in Eastern Europe, the outflow of capital during the crisis was three times higher than the inflow, which is more or less normal and what you expect.

Foreign investment was considered extremely useful for the country. I also believe that if a company gets bought by a multinational, the company will become more efficient. But this doesn’t mean that the spillover effects will be positive. The multinational will probably cut off links between the company and the rest of the economy and establish links instead within its own production chain. It’s also said that a lot of technological change comes to a country this way. But this is simply not true. If you look at what was taken over by foreign multinationals in Eastern Europe – telecommunications, banking, finance – this doesn’t brings in a lot of new technology or knowledge. The consequences of FDI can be sometimes positive and sometimes negative. What bothers me is the belief that FDI is always a positive thing. In longer run, it probably isn’t. During the 2009-12 crisis, the outflow of capital was higher than the inflow of capital in Eastern Europe because when the mother country gets in trouble, it will try to get as much money as possible.

But now we are selling. We are privatizing. But this is ideological privatization. I still remember nationalization. I am from a family that was any “enemy of the people.” My grandfather was a local capitalist. In 1948, everything was nationalized, even the barbershops. This was to establish socialism, or to prevent capitalism, and it was complete nonsense. It was ideological nationalization. What we are privatizing now is under pressure from the EU. It is privatization for privatization’s sake. It won’t bring that much money to country. It’s just ideological, in the same way that nationalization was before. I don’t believe that the government should have shares in all companies. There was no one to take over some of the companies, and that’s why the government remains an owner. But why should we sell Slovenian Telekom? The buyer will probably be German Telekom, which is also state-owned!


And it’s a terrible time to be selling.


Yes, the prices are very low. But if it had been sold during the gambling period, we would have bought shares and we would still be in a similar situation.


From what I understand, you were not enthusiastic about Slovenia joining the EU.


No, I was not. I considered it an emergency exit. What else could we do? Everyone else is in. We’re a small country. But I just didn’t like the enthusiasm, and this was also true for the monetary union. I still consider the whole monetary union a mistake. There differences between the countries were too large to establish such a monetary union. As I wrote in 1998, this was a political creation that had nothing to do with economics. You cannot create what is known as an optimal currency area, with Greece on one side and Germany on the other. Some countries clearly belong to such an area – Germany, Austria, Benelux. But other countries don’t belong, including Italy and France. I usually compare monetary union with the idea of brotherhood and unity in Yugoslavia. They are both ideas you should not question and that are supposed to last forever. There are no provisions for exit.

I didn’t object to entering the euro area. I was just skeptical about entering. What I did not like was the celebration. We were giving up an important attribute of independence, and we were celebrating. Okay, I can accept an emergency exit, but it’s not something to celebrate. That’s why I was considered a Euroskeptic.

I am very afraid of what might happen with the EU. The situation would be better for Greece if it could just print some drachma and have inflation. But in the end, with all this debt, what is the most appropriate solution? Probably inflation. Here I’m not talking about just Slovenia, but other countries as well. It’s somewhat the same in the United States, with all this debt emerging. In the Old Testament, there was a solution: every seven years, you were supposed to forgive debt. Now it’s not so easy because there are deposits on the other side. People are very angry about bailing out the banks, but they are also rescuing these deposits.

I’m not very friendly toward European bureaucracy. Europe made mistakes with the Lisbon strategy when they proclaimed the creation of a knowledge-based society. It’s complete nonsense. Of course it’s very nice to hear this phrase “knowledge-based society.” But over the same decade they destroyed European industry. Everything moved to China. True, everybody was happy with very cheap products. But European authorities should request that European businesses operating overseas should adopt the social standards that exist in Europe. That would slow down deindustrialization, and some companies would still be left in Europe. Germany is a special case. They kept part of industry. Now the EU is talking about solving the problem of youth unemployment. But they created this problem! They are talking about reindustrialization, but they deindustrialized all of Europe! This is also true for the United States, as far as I can understand it, though it’s a special case because of the role played by the U.S. currency.


The EU once represented an alternative to what was once called “Anglo-American capitalism.” Do you think the EU can once again go back to its earlier principles?


I do hope so. Europe too has left behind Europe-style capitalism. What is the solution now? It’s too late to close off the EU from foreign competition. They should have been much more aware 10-20 years ago about what they were doing, and now it’s too late.

One of the problems I have with the EU is all the empty words they produce. I was accustomed to these resolutions in Yugoslavia. Take the case of the law on banks we wrote in 1991 when we established monetary independence. The law had 5,006 words. Then, as we were getting closer to EU membership, we were trying to cope with EU regulations. So, in 1999, we produced a new banking law. Instead of 5,010 words, there were 25,000 words. Then, in 2006, we made yet another banking law, similar to what was produced in Europe, and it had 47,000 words. And they were all about the same thing! The first law could have been a textbook: it had everything in it. Now if you read some of these EU directives, they go up to 200,000 words. Who reads this?

The European Commission is the most harmful institution we have. We were much more independent when we were part of Yugoslavia. We don’t have any tools any more. We are no longer a country. We are just a small province of the European Union. What does a country have? It should have money, taxes or fiscal policy, some rules, and some borders. All these things have disappeared. I’m not saying that this is bad, but I’m saying that we are just a province. I don’t like this centralization. At the same time I’m worried about what might happen if the monetary union is dissolved.


When you look back to the positions you had in 1990, have you had any major changes in your thinking?


I am probably much more pro-socialist than I was at that time. I am more firmly convinced that we should care more about the distribution of income than we do. I still believe that we should have free education, free health service, and social security. This is all part of social democratic thinking. In a way I admire Scandinavian society. Of course they are in much better shape. In this respect, I am much more to the Left than I used to be when I entered the government in 1990.

Whether I am sorry about what I did – I would say no, not even the resignation. I was probably angry for two months. Many political leaders were very happy when I resigned. If I’d been an experienced politician, I would not have done it. But I wanted to have a good opinion of myself, so I had no other choice except to resign. After that, I went to the bank. Then I was rector of the university for two mandates, eight years.

I’m not very happy now because I have to retire in February. There’s a special law by which all public servants have to retire.


But you can stay at the institute.


Yes, I was only talking about the university. I am a co-owner of this institute. There are five owners, and we were all employees of the institute. The former boss privatized the institute, which he had established as a part of the law school. Then we separated, and he was able to privatize it.


The last questions are quantitative. When you look back to 1989 and everything that has changed in Slovenia from 1989 to today, how would you evaluate that on a scale of 1 to 10 with 1 being most dissatisfied and 10 most satisfied?


If I am to be a realistic, I would say 7.


Same scale, same period of time: your own personal life.


If I don’t take into account the last few months, which weren’t so good, I would say 8.


And how would you evaluate the prospects for Slovenia over the next couple years, with 1 being most pessimistic and 10 being most optimistic?




Ljubljana, August 6, 2013




  1. Transition in Slovenia: the Socialists took the money by Western capitalists provided for the development of the country + all the added value that the citizens managed to create in the past twenty-five years. After the transition all that’s left to the Slovene nation are fucking debts and long-term vegetating in deprivation and misery without any prospects.

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