01/14/2014 07:59 am ET Updated Mar 16, 2014

Slovenia's Gradualist Transition

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

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?

To read the rest of the interview, click here.