Slovenia has been deeply affected by the global crisis, but is now recovering gradually along with the rest of the OECD area. As Slovenia is a small open economy within the euro area, it is crucial for it to rapidly rebalance its economy and restore competitiveness. The proposed pension reform is a first step in the right direction to improve fiscal sustainability and boost labour supply. However, a further comprehensive pension reform is needed. To get closer to the technology and efficiency frontiers, reforms of the education system and policies to promote innovation, labour market flexibility and a friendlier environment for foreign direct investment (FDI) would be helpful.

After steady convergence towards the European Union average in terms of GDP per capita, the Slovenian economy has been severely hit by the global crisis. Gross domestic product (GDP) fell by close to 8% in 2009, among the deepest declines in the OECD, but is poised to grow modestly in 2010 before growth picks up to 2-3% in 2011-12. The sharp drop in liquidity in the midst of the crisis required significant support to the financial system from the government and the European Central Bank. The financial health of households and firms has been weakened by reduced asset prices, incomes and the availability of credit. Although exports have rebounded strongly since mid-2009, domestic demand has been held back by the weak labour market and ongoing deleveraging by financial institutions and businesses. Needed fiscal consolidation will also constrain growth in the short term.

Slovenia enjoyed strong economic growth before the crisis but faced one of the most pronounced recessions in the OECD in 2009. The crisis has revealed important weaknesses in Slovenia’s pre-crisis economic performance, which was excessively dependent on credit and construction activity. To rebalance the economy, the authorities need to take decisive policy actions. On the macroeconomic side, they should ensure a durable reduction in the structural deficit to avoid any loss of investor confidence, and necessary measures should be taken to support the banking sector to alleviate the risks of credit rationing. On the structural side, the challenge is to restore competitiveness and raise potential growth so as to continue sustained convergence towards more advanced OECD economies. Despite a significant proposed pension reform, further comprehensive steps are of outmost necessity to improve long-term fiscal sustainability and boost the labour supply of older workers. Measures to improve the functioning of the labour market, notably to raise labour demand for older and less-qualified workers, are also needed. Particular attention should be paid to labour costs at the minimum wage level. To get closer to the technology frontier, Slovenia should improve its innovation framework (Chapter 1) and education policies (Chapter 2). Foreign direct investment and the governance of state-owned enterprises both need to be strengthened to stimulate economic dynamism and raise productivity (Chapter 3).

Overall, the education system fares well by international comparison. Slovenia has one of the highest shares of the population aged 25 to 64 to have completed at least upper secondary education, and ranks high in international educational achievement tests. Nevertheless, in some areas, reforms could significantly improve performance and equip the labour force with the skills most in demand in a rapidly changing economy. In particular, low student-teacher ratios, small class sizes, and a high share of non-teaching staff suggest that there is room for improving spending efficiency. Rationalising teaching and non-teaching staff would also free up valuable public resources that could be redirected towards underfunded aspects of the education system. Low enrolment rates in short vocational education programmes and in certain higher education fields, such as science and engineering, contribute to a skill deficit in some occupations, underlining the need to make such programmes more attractive. At the tertiary level, completion rates and spending per student are low by international standards, and students take too long to complete their studies. The combination of low student fees and access to generous financial support, coupled with the preferential treatment of student work until recently, creates “fake students”; it also provides genuine students with an incentive to remain in the tertiary education system too long. Introducing universal tuition fees along with loans with income-contingent repayment would help to address such issues.

Slovenia’s productivity levels have converged rapidly towards the euro area and OECD averages since it began the transition to a market economy in the early 1990s. However, a gap of 30% in aggregate productivity remains vis-à-vis the upper half of OECD countries and productivity is low in a number of industrial sectors with high public ownership or low foreign ownership. The somewhat skewed pattern of asset ownership in the country is related to past government policies that either directly or indirectly favoured domestic public and private investors. For example, Slovenia’s initial privatisation programme favoured existing internal stakeholders, there was limited privatisation of public utilities and the two state-owned investment funds were allowed to acquire blocking shares in many of the country’s largest private firms. Foreign investment has also been deterred by labour market institutions that have raised the relative unit cost of employing workers compared to some other transition economies.