Development Report
Development Report 2021
The Development Report, an annual publication prepared by the Institute of Macroeconomic Analysis and Development, which monitors the realisation of the Slovenian Development Strategy 2030, brings important recommendations for development policy. Short-term priorities continue to be highly related to preventing the spread of the covid-19 epidemic and mitigating its socio-economic consequences. These measures still play a very important role in sustaining economic and social potential, so their withdrawal should be gradual and well planned. At the same time, it is increasingly important to design well-targeted and efficient measures for the recovery, which should be combined with structural reforms for greater resilience of the economy and society to shocks and more sustainable development in the long term.
In 2020, the Slovenian economy was strongly marked by the covid-19 epidemic, which significantly affected quality of life, while also bringing certain new opportunities. The crisis caused by the covid-19 epidemic interrupted several years of economic growth and favourable labour market developments, although its impact on the economy and the population was markedly mitigated by government measures. In the period before the covid-19 epidemic and after the financial and economic crisis, Slovenia was again catching up with more developed Member States, achieving historically high employment rates and favourable values of social inclusion indicators. The efficiency of resource and energy consumption was also rising steadily. However, Slovenia also entered the year 2020 with some unresolved development challenges, which have been further deepened by the epidemic. Many of them also have increased its vulnerability in this period. Economic convergence in the last few years has been based only to a small extent on productivity gains, which is closely linked to insufficient investment, particularly in various forms of intangible capital. In the phase of recovery, it will therefore be necessary to strengthen investment activity and compensate for the lack of appropriate knowledge and skills of the future, which has so far been insufficiently addressed. Due to their high exposure to temporary employment forms, unemployment of young people rose at an above-average rate in 2020. But above all, the problems of social protection systems (long-term care, health system capacities and waiting times, the long-term sustainability of financing, especially pension expenditure) were exacerbated during the epidemic. From the environmental perspective, a pressing problem is a too slow introduction of changes towards a low-carbon circular economy, high GHG emissions from transport, a several-year stagnation in the use of renewable energy sources and insufficiently sustainable land use.
Among Slovenia’s main long-term development challenges analysed in the Development Report 2021, we highlight the following areas:
- accelerating productivity growth
- strengthening inclusive social development and intergenerational solidarity
- accelerating the transition to a low-carbon circular economy
- strengthening the developmental role of the government and its institutions
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Indicators of Slovenia's development:
1. Gross domestic product per capita in purchasing power standards
Slovenia continued to reduce the economic development gap with the EU average in 2019, measured in gross domestic product per capita in purchasing power standards (PPS), though it remained higher than in 2008. At 27.700 PPS, it reached 89% of the EU average, which is 2 p.p. above the value reached in the previous year and 2 p.p. below the highest value achieved before the onset of the global financial crisis in 2008. The decomposition of GDP per capita to productivity and employment rates shows that reducing the economic development gap with the EU average, which has been happening since 2016, was driven mainly by a relatively fast increase in employment rates relative to the EU and, to a lesser extent, by productivity growth. The employment rate in Slovenia was above the EU average every year and exceeded it by 7% in 2019. However, productivity remained relatively low (83% of the EU average in 2019), and the gap in this area thus fully explains the relatively low level of economic development of Slovenia as measured by the GDP per capita indicator.
Slovenia’s position in terms of the average level of development of the EU remained the same in 2019 as it was in 2005, while the majority of the new EU Member States made considerable progress in this period. Compared to 2005, 14 Member States improved their position relative to the EU average, most notably Ireland (by 43 p.p.), and all the other new Member States except Cyprus and Slovenia. Eleven Member States deviated from the EU average during this period, most notably Greece (28 p.p.). In 2008, Greece (95%) and the Czech Republic (86%) were closest to Slovenia in terms of GDP per capita in PPS; in 2019 it was Cyprus (90%) and Spain (91%). In 2019, compared to the previous year, 14 EU Member States improved their development position relative to the EU average, the most Romania (4 p.p.), while four Member States kept the same position and nine worsened their positions, most notably Germany (3 p.p.). Luxembourg still exceeds the EU average by 160%, followed by Ireland, by 193% of the EU average. The gap in the GDP per capita indicator in PPS between the EU Member States, which in 2000 was at 1:9.8 (Romania/Luxembourg), has been narrowing over the years, falling to 1:4.9 in 2019 (Bulgaria/Luxembourg).
Comparison of approaching the EU average by GDP per capita in PPS from 2005 to 2019 for new EU Member States, in percentage points (EU=100)
2. Real GDP growth
In 2020, gross domestic product fell sharply, following six years of solid growth, due to the COVID-19 epidemic. Following a decline during the global financial crisis, real GDP had been growing since 2014. Economic growth was increasing over the period 2014–2017 and then began to slow down. The slowdown was largely due to weaker economic growth in trading partners and uncertainties in terms of international trade and political relations. In 2020, all GDP components declined due to the COVID-19 epidemic and the associated constraints, with the exception of government expenditure, which strengthened as a result of the epidemic-related measures. Due to restricted movement and limited supply during the quarantine period, when spending opportunities were severely curtailed, and due to increased uncertainty and precautionary and forced savings, private consumption fell sharply, although disposable income did not change much, backed by government support measures. These measures also prevented a significant fall in employment. Due to negative impacts from the international environment and foreign and domestic containment measures, exports and imports fell sharply, particularly in the spring. Fall in demand and increased uncertainty led to a contraction in corporate investment, both in buildings and in equipment and machinery, while public investment slightly strengthened.
After years of higher growth, in 2020 real GDP declined less than the EU average. After a sharp fall during the global financial crisis, economic activity in Slovenia had grown faster than the EU average since 2014 and declined less in 2020 (Slovenia: -5.5%; EU: -6.2%), so Slovenia remains on a path of real convergence (i.e. approaching the EU average GDP per capita). The smaller fall in GDP in 2020 than the EU average predominantly resulted from the foreign trade balance, which was slightly positive in Slovenia and negative in terms of the EU average, and from a smaller fall in gross fixed capital formation, while the fall in private consumption was greater in Slovenia. However, the decline of economic activity in Slovenia was larger and the growth in recent years was slower than the average in other new EU Member States, which Slovenia has been lagging behind by 17 p.p. since 2005 in terms of cumulative growth.
3. General government debt
General government debt increased sharply in 2020 after several years of decrease. Debt decreased by 17 p.p. in 2015–2019 during a period of economic growth and fiscal balance measures, with the debt decrease among EU Member States higher only in Ireland. The decrease also exceeded the requirements stemming from fiscal rules. The sharp economic downturn in 2020, which caused a decline in revenue and whose consequences were mitigated by the government through generous measures to offset the effects of the epidemic, contributed to a significant deterioration of the primary balance (interest-free balance) and thus the general government debt (to 80.8% of GDP). The increase in debt also stemmed from the unfavourable "snowball effect" and large-scale pre-financing. In a low interest rate environment facilitated by expansionary monetary policy, the pre-financing of the state budget, which represents the bulk of the government debt, amounted to EUR 3.5 billion or 45% of its total annual indebtedness. This created additional liquidity reserves in uncertain circumstances before 2021, when the projected maturity of the principal debt is higher in relative terms than the multiannual average. The increase in debt in 2020 was largest in the countries with the most severe containment measures and a previous high level of debt; in Slovenia it was similar to the estimated EMU average.
4. Fiscal balance
The deep economic downturn and the measures aimed at mitigating the consequences of the COVID-19 epidemic have severely worsened the fiscal situation. The general government balance, which was balanced in 2017 and demonstrated a surplus in 2018–2019, turned into a deficit (-8.4% of GDP) in 2020. Already in 2019, the revenue growth slowed considerably as a result of the moderation of economic activity growth, reduced taxation (holiday allowance) and a fall in the government’s revenue from property due to the sale of ownership shares. In 2020, revenues fell sharply (-4.6%), mainly due to a cyclical decrease in tax revenues and further tax relief (personal income tax, reduction of excise duties on energy products) and also to tax exemptions provided by the emergency legislation . Revenues from property also decreased further. Expenditure growth gradually increased in 2018–2019 due to the easing of measures in place for a number of years following the financial crisis, new statutory obligations (particularly concerning social transfers and wages) and stronger increase in general government investments, which rose from the historically lowest levels in 2016 and 2017 (from 3.1% to 3.8% of GDP in 2019). In 2019, expenditure growth already exceeded revenue growth, and in 2020 an even stronger expenditure growth was mainly related to intervention measures aimed at mitigating the effects of the epidemic. It is estimated that this expenditure amounted to around 5.4% of GDP, most of which was devoted to maintaining jobs, mitigating the income situation of vulnerable groups and the operation of public services, in particular the healthcare system. Furthermore, investments continued to increase in 2020, as did some other expenditure on a permanent basis (compensation for employees due to the employment growth and the public sector wage agreement in 2018, personal assistance expenses, etc.).
The EC announced the decision to activate the general escape clause from the fiscal rules for the euro area shortly after the outbreak of the epidemic, which allowed countries to respond much more quickly than at the onset of the financial crisis. The general escape clause was activated in March 2020, and at the same time the EC made a recommendation to the EU Member States to provide targeted and temporary fiscal support under these circumstances while safeguarding the sustainability of public finances in the medium term. The deficit exceeded 6% of GDP in most countries; according to available estimates, it was around the EU average in Slovenia. In international comparisons, the impact of discretionary measures to mitigate the effects of the epidemic was in terms of general government expenditure higher in Slovenia than the EU average but smaller in terms of used guarantee schemes (EC, 2021; EU IFI, 2021).
5. Current account of the balance of payments and net financial position of Slovenia towards the rest of the world
In 2020, the current account surplus, which Slovenia has had since 2012, was the highest ever (EUR 3.3 billion or 7.1% of GDP). The surplus, which has accumulated since 2012, was related to extensive deleveraging of banks and companies abroad, favourable international conditions and an increase in exporters’ competitiveness along with moderate import growth due to relatively low domestic consumption. Positive terms of trade also contributed to the growth of the surplus over the period 2013–2016. In 2020, the impact of the epidemic was mainly reflected in the current account of the balance of payments in the segment of trade in goods and services. The higher current operations surplus was mainly due to a higher trade surplus, as the decline in real imports was stronger than the decline in exports, given a decrease in household consumption and investment. Owing to a fall in the prices of energy-generating products and the prices of industrial products, import prices fell more than export prices, which improved trade conditions by 1.2% and increased the trade surplus by approximately EUR 300 million. The service surplus decreased, mostly in the travel segment and partly in the transport segment. Net outflows of primary income were lower, mainly due to lower net outflows of equity income from direct investment. In terms of the savings and investment gap, the surplus of current transactions reflects extensive savings of the private sector (households and non-financial corporations).
Owing to the impact of the pandemic on international financial flows, Slovenia's international investment position deteriorated slightly in 2020 (to 16.3% of GDP). This trend was contributed to by a net inflow of financial resources from the public sector, which exceeded the net outflow of funds from the Bank of Slovenia and the private sector. The government placed liquidity surpluses on accounts abroad, and in 2020, due to the measures to mitigate the effects of the pandemic, it borrowed significantly from foreign portfolio investors in order to finance the budget deficit and repay the principal of government debt in 2021. Given the volatile situation on international financial markets, the government also increased its liabilities in financial derivatives, thereby hedging the issued government bonds against exchange rate and interest rate risks. The Bank of Slovenia increased its net capital outflow mainly due to higher receivables in the TARGET payment system. The private sector further increased financial investment in foreign securities, while at the same time, non-financial corporations reduced liabilities in the short-term commercial credit segment and commercial banks continued to deleverage towards the rest of the world. The inflow of foreign direct investment into Slovenia has increased in recent years due to the sale of ownership shares in domestic companies and exceeded the value of Slovenian direct investment in foreign countries.
6. Financial stability
The Slovenian financial system remained stable due to the rapid response of economic policymakers following the outbreak of the COVID-19 epidemic. As a result of the aggravated economic situation linked to the outbreak of the epidemic, risks to financial stability initially increased considerably, and capital markets responded most rapidly and most strongly to the outbreak of the epidemic. In the face of increased uncertainty, stock exchange indices decreased significantly, while interest rates on government bonds increased, especially in peripheral countries, including Slovenia. However, rapid and comprehensive action by economic policymakers to mitigate the negative economic consequences after the first wave of the epidemic restored confidence in the financial markets, which has remained relatively high, without significant fluctuations, in spite of increased uncertainty and the higher number of second-wave infections. Nevertheless, higher risks to financial stability are expected over the medium term, when, as a result of higher debt, the spill-over risks between public and private sector indebtedness and the financial system will also increase (ECB, 2020a).
The situation in the Slovenian banking system improved considerably after the recovery following the last financial crisis and remained stable even at the outbreak of the epidemic. After declining rapidly in recent years, the share of non-performing assets remained unchanged in the third quarter of 2020. The liquidity of the banking system remained sound in 2020, and the ECB provided additional liquidity to banks through standard instruments and additional measures. Despite the deterioration at the beginning of the year, the capital adequacy ratio of the banking system, due to the relatively high credit activity before the outbreak of the epidemic, strengthened again in the third quarter of 2020 and remained better than the EU average. With retained profits, banks contributed to the strengthening of the highest quality capital. According to the Bank of Slovenia, the banking system’s exposure to the most badly affected activities is relatively low (BS, 2020), but despite this, the share of non-performing assets in the banking system can be expected to increase in the future.
7. Financial system development
In 2020, a relatively wide gap between Slovenia and the EU average in the development level of the banking system and the capital market increased further, despite the growth in the value of development indicators. The growth of the balance sheet total, peaking at 8.2%, was the highest in the last ten years and, together with a decline in GDP, led to a marked increase in the balance sheet total indicator relative to GDP. It stemmed from a relatively rapid increase in the deposits of domestic non-banking sectors, as household savings increased significantly during the epidemic and corporate deposits also increased as production and investment declined. As a result, the banking sector’s investment structure changed. Lending activity slowed down considerably and banks in particular strengthened their deposits with the central bank, which had a negative interest rate to some extent, which may have a negative impact on the business performance of the banking system. The loan-to-deposit ratio of the non-banking sector thus stood at 0.71 at the end of 2020, which is two-fifths below the average level in 2005–2008, i.e. before the onset of the global financial crisis. With the rapid growth of deposits from domestic non-banking sectors and modest lending activity, the banks’ need for foreign financing was modest and the share of liabilities to foreign banks remained low (5.3%). The market capitalisation of shares listed on the Ljubljana Stock Exchange is modest, declining by around 2% in 2020, while it remained almost unchanged in the rest of the EU. The financing of companies in Slovenia through the issue of shares is still negligible.
The development gap with the EU average in the insurance sector is smaller than in other segments of the financial system but has remained at a similar level for a number of years. The share of insurance premiums compared to GDP has been slightly above 5% for several years and in 2019 was at around two-thirds of the EU average level. The relatively small development gap is due to the high (above-average) level of non-life insurance premiums, while the share of life insurance is modest as a result of the conservative savings habits of households and the too modest significance of old-age savings.
8. Regional variation in GDP per capita
In 2019, the Osrednjeslovenska region, the one with the highest GDP per capita, exceeded the Slovenian average by more than 40%. Located in this region is the capital, with its state-building functions and many jobs which also provide employment to inhabitants of other regions, who thus contribute to creating the highest GDP per capita in Slovenia. Jugovzhodna Slovenija, whose economy is primarily focused on the pharmaceutical and automotive industries, had the highest economic growth in 2019 and came very close to the Slovenian average. The Obalno-kraška region, which in 2018 still exceeded the Slovenian average in terms of GDP per capita, lagged behind it in the face of a real fall in economic growth in 2019. In 2020, it was also the region with the largest drop in employment due to the COVID-19 crisis (see Indicator 3.17). In 2019, the lag behind the Slovenian average also increased in the Goriška, Primorsko-Notranjska, Koroška and Pomurska regions. The Zasavska region, which lags most considerably behind the Slovenian average, experienced above-average economic growth in 2019, yet it still achieved only a good half of the national average GDP per capita.
Regional disparities, which had increased most significantly in the global financial crisis, were stable in recent years and slightly higher than their lowest level in 2000. In 2019, the relative dispersion of GDP per capita (21.6%) was 0.2 p.p. lower than in 2018. However, it was still 2 p. p. higher than in 2000, when the ratio between the two extreme regions (1:2) was also lower than in 2019 (1:2.7). In that year, the disparities between the two cohesion regions also decreased slightly due to both higher economic growth and slower population growth in the Vzhodna Slovenija cohesion region, which had also been the reason for smaller disparities between the two regions in the first years of the global financial crisis.
Since 2016, the Zahodna Slovenija cohesion region has re-established its position as one of the more developed European regions, while Vzhodna Slovenija remains one of the less developed regions. Among statistical regions, the Osrednjeslovenska region alone exceeded the EU average in 2019. Given the considerable lagging behind the European average of the majority of the regions, the catching up with the European average in terms of development seems to be an extremely complex long-term objective. For comparison, the gap between individual statistical regions and regions in the neighbouring countries which are at a similar development stage is indicated. In 2017 (the latest data), the Osrednjeslovenska region lagged behind the Klagenfurt–Villach region by 3 index points, the Goriška region behind the Italian Gorizia by 14 index points and the Pomurska region behind the Hungarian Vas by 8 index points.
9. The European Innovation Index
Regarding the European Innovation Index (EII), Slovenia has been classified in the group of moderate innovators since 2018, after having been classified among the strong innovators for a longer period of time. The EII monitors the performance of EU Member States’ national research and innovation systems on ten components. It is a composite indicator whose value determines the classification of countries into four groups. The calculation of EII 2019 includes data for the period 2016–2019, so the impact of the COVID-19 epidemic is not yet covered. The EII value for Slovenia has been deteriorating since 2015, while the European average started to increase a year earlier. Slovenia also regressed in the last EII measurement for 2019 compared to the previous year, with most of the EII indicators showing a fall (15 out of 27). Among the EII components, the worst result compared to the EU average was achieved in terms of finance and support, which is mainly a result of traditionally lowest values of risk capital, even in terms of international comparisons. In addition, the contribution of public sector investments in R&D in 2012–2016, when they were steadily decreasing even in absolute terms, was also negative, and between 2012 and 2019 Slovenia significantly increased the gap by 24 index points. A major setback and widening gap in comparison with the EU average was recorded between 2012 and 2019 in the innovation-friendly environment component as a result of a significant decline in the motivational entrepreneurship index in recent years, because the number of necessity-driven entrepreneurs grew more than the number of opportunity-driven ones. A significant deterioration in the human resources component, which was mainly a result of the changes in the education system in this period, was also recorded, and Slovenia thus moved away from the leading countries towards the EU average. There has also been a setback in linkages between different actors and firms’ investments to promote innovation, meaning that Slovenia is now only slightly above the EU average. However, an improvement in the result compared to the EU average was recorded in the employment impacts, mainly due to the high share of employees in the fast-growing enterprises of the most innovative industries, which increased by 57 index points between 2012 and 2019.
European Innovation Index
10. Productivity
Following the global financial crisis, productivity growth slowed down and along with it also the closing of the productivity gap to the EU average in the direction of the SDS target. In 2000–2008, the average annual productivity growth stood at 3.0%, while in 2009–2019, it slowed to 0.6% (or to 1.4% in the period of economic expansion 2014–2019). A key factor in the slower growth was more modest capital deepening, even in the years when the environment for investment had already improved considerably. The slowdown in productivity growth also slowed the closing of gap with respect to the average EU productivity level and thus the process of real convergence with the more developed EU Member States.
In 2020, productivity, measured by value added per employee, decreased sharply. With a sudden drop in demand and restrictions on activities due to the COVID-19 outbreak and the simultaneous large-scale job retention schemes, labour productivity, measured by GDP per employee, fell by 4.6% in 2020. The decline in productivity was comparable to the EU average both in total (-4.7%) and in most sectors. The largest decreases in value added per employee were recorded in services with restrictions on doing business, i.e. arts, entertainment and recreational activities, accommodation and food services and trade, both in Slovenia and in the EU. In manufacturing, which is the most export-oriented part of the economy and where productivity significantly determines its export competitiveness, the drop in productivity was among the lower in the business sector and among the milder ones compared to other EU Member States. This is even more true for the construction sector, while the decline in ICT productivity was larger than the EU average, thus continuing the trend of lagging productivity in these activities compared to the trends in other EU Member States. In Slovenia, the decline in the productivity of the overall economy was slightly lower than in the first year following the onset of the global financial crisis (deeper in the EU on average) and, in line with the nature of the crisis, the differences between activities were significant. Compared to the trends in 2009, the decline in productivity was much more pronounced in the above-mentioned non-financial market services and smaller in construction and manufacturing.
11. The Digital Economy and Society Index
Despite absolute progress in digital competitiveness, Slovenia has been increasingly lagging behind the EU average, moving away from the goal of a timely and successful digital transition of the country. The Digital Economy and Society Index (DESI) measures the digital competitiveness of EU Member States in areas of connectivity, human capital, the use of internet services, integration of digital technologies and digital public services. The calculation of DESI 2020 is based on data for the previous year and does not yet include the impact of the COVID-19 epidemic. Although Slovenia improved its ranking by one place in the last report, it also saw its lag behind the EU average increase. The analysis by components shows that Slovenia is far behind the EU average in terms of the use of internet services, particularly regarding video calls and online banking and shopping. In terms of human capital and the integration of digital technologies in companies, it was closer to the EU average, but there was only a slight trend of catching up with more developed countries. Despite the average achievements, the results in these two areas are also assessed as insufficient in terms of the need for a faster digital transition of the country. The latest data showed low levels of basic digital skills and knowledge of the population, and for a more ambitious digital transition, the barely average (compared to the EU) availability of ICT professionals and graduates also proved to be problematic. Nor have the latest data been encouraging in terms of the speed of integration of digital technologies, which remains a challenge particularly in small and medium-sized companies (EC, 2020b). In terms of connectivity, Slovenia has been ranked above the EU average in recent years but has gradually lost its advantage. In the latest DESI (2020) publication, it thus achieved only an average result, mainly due to the lack of readiness for 5G and the slow expansion of mobile broadband connections. In addition, Slovenia faces the problem of a gap between urban and rural areas (ibid.) in high capacity broadband coverage. Developments in digital public services in recent years were somewhat more encouraging, especially in the provision of these services (pre-filled forms, the possibility of online provision of services, open data), but their use has remained low among both individuals and businesses. The reasons for this include the complexity of use of qualified digital certificates for the average user and, in the case of businesses, low trust and the absence of secure and unique identifiers (ibid.).
12. Export market share
After a sharp decline during the global financial crisis, Slovenia’s export market share was mainly increasing in 2013–2019 and after a decade returned to the pre-crisis level. In 2007, Slovenia accounted for around 0.2% of global goods import, which in 2008–2012 was followed by a sharp drop in the world market share, one of the largest in the region. More than half of the drop in the market share during that period can be attributed to the export orientation (mainly geographical) on slower-growing markets, while a strong decline in (cost) competitiveness at the beginning of the global financial crisis also had an adverse impact (see also Indicator 1.13). With an improvement in price/cost competitiveness and the strengthening of import demand in major trading partners, the market share after 2013 started increasing again, more markedly in 2016–2018.
The outbreak of the COVID-19 pandemic had a highly asymmetrical impact on export markets and on quarterly dynamics, which importantly affected the Slovenian market share in 2020. The worldwide spread of the epidemic led to a sharp decline in global imports and exports, especially in the initial period. The fall in Slovenian exports in the spring months was even deeper than the fall in the global import; Slovenia’s market share on the world market (excluding exports of pharmaceutical products to Switzerland) decreased by 1.7% on average in the first three quarters of 2020. The first estimates for the last quarter, however, indicate strengthening of the Slovenian market share despite the poor epidemiological conditions. Fluctuations in Slovenian market share in 2020 were more related to the structure of Slovenian exports than to its competitiveness. Based on detailed data on the export and import flows of EU Member States, where approximately three quarters of Slovenian goods exports is oriented, it is estimated that the COVID-19 crisis had a largely asymmetrical impact across various product groups. One of the most affected was the import of passenger cars, which represents the largest group of Slovenian exports. The value of imports of iron and steel and power-generating machinery also fell significantly. The unfavourable impact of the export structure was mitigated by the increased import demand for medical and pharmaceutical products, with an above-average share in Slovenian exports. The export and production of these products generally fluctuate less with the business cycle, and in the current health crisis, the demand for these products increased markedly. At the same time, Slovenian exporters in this segment further increased their market share on the EU market, i.e. Slovenian exports increased more than the imports of EU Member States. At the end of the year, EU imports of electrical machinery and equipment, which also have a relatively high share in Slovenian exports, also increased considerably.
Change in imports from the EU and Slovenian exports to the EU in 2020, by major product groups
13. Real unit labour costs
The divergence of productivity and wages that occurred during the global financial crisis and was reflected in the growth of real unit labour costs, only gradually decreased; due to the modest strengthening of the long-term productivity potential, it was based more on restrained wage and employment growth. At the beginning of the global financial crisis, Slovenia saw a significant deterioration in its cost-competitiveness as a result of declining productivity (2009) and a rather high wage growth (2010) given the economic circumstances. Adjustments arising in particular from the labour market, more specifically restrained wage growth and (passive) productivity increase through declining employment, were followed by a period of relatively aligned wage and productivity growth (2014–2017). However, real unit labour costs started to increase again during 2018 and even more significantly in 2019 (1.9%).
The outbreak of the COVID-19 epidemic led to a significant increase in statistically observed real unit labour costs, but in this crisis, most of the increased labour cost burden has so far been borne by the state. In 2020, real unit labour cost (hereinafter: RULC) grew by 5.9%. Due to higher increase in compensation of employees, the increase in RULC was more pronounced compared to the EU average, both in the total (EU 3.1%) and in the business sector which includes industry, construction and market-oriented services (Slovenia 3.6%; EU 3.0%). In the most export-oriented sector – manufacturing – decrease in productivity was less pronounced and the increase in RULC in 2020 (2.3%) was comparable to the EU average (2.1%). A strong increase in statistically observed RULC could indicate a deterioration of business results and, in sectors where their growth is higher than in the EU and other major trading partners, also impaired cost competitiveness, but such conclusions for 2020 are rather uncertain. Namely, in order to mitigate the consequences of the epidemic, part of the compensation of employees was born by the state rather than employers, in both Slovenia and its trading partners. In fact, we estimate that in Slovenia, the majority of last year’s increase in RULC burdened the budget, while the adjusted or actual RULC of companies did not increase on average. Although, according to official statistics, the increase in RULC in 2020 was higher than in the first year following the onset of the global financial crisis, we estimate that the impact on cost competitiveness and business results has so far been smaller due to more extensive government intervention.
14. Exports of high-tech products and knowledge-intensive services
The share of high-tech products was fairly stable in recent years and higher than the EU average. It increased more noticeably in 2005–2010 and especially during the global financial crisis, when some other, less competitive industries (certain low-tech products, such as textiles) began to shrink sharply. In the years following the crisis, high-tech exports increased in absolute values, while the share remained at the achieved level. Around half of these exports are medical and pharmaceutical products and electrical machinery and appliances; in recent years up to 2019, the export share of aeronautical products increased the most. Exports of medium-tech products account for the largest part of commodity exports and are strongly integrated into global value chains. In 2019, their share decreased slightly, which is associated with the slowdown in foreign demand, especially the activities in the automotive industry.
The share of knowledge-intensive services is low in international comparison. Between 2010 and 2017, it gradually increased from 20.6% to 24.2%, and then merely fluctuated around the achieved level until 2019, which further increased the wide gap in comparison with the EU average (to 14 p.p.). The majority of services lagged behind the European average, with computer services demonstrating the greatest lag (in 2019 by more than 9 p.p.). Some of Slovenia’s closest competitors (e.g. the Czech Republic, Estonia and Portugal) achieved significantly higher growth in computer services exports in 2010–2019 (on average 20% per year against Slovenia’s 11.9%). In Slovenia, a higher share than the EU average was achieved mainly by telecommunications services, but this share has been decreasing since 2017. In Slovenia, exports of technical, trade-related services increased significantly over the ten-year period, i.e. by an average of 10.2% per year, while in the EU, the export of information services increased the most, i.e. by 20.2% per year, with Eastern European Member States leading in these exports.
15. Foreign direct investment
Inward foreign direct investment (FDI) into Slovenia began to increase more rapidly from 2015, while outward FDI has remained modest. Higher inward FDI, which increased by as much as 43.3% in the last five years (2015–2020), was primarily due to the acceleration of the privatisation process and increased sales of equity stakes in Slovenian companies. There were also more expansions of the existing foreign-owned companies in Slovenia and new (greenfield) investment. The results of the SPIRIT survey in 2014–2018 show that every year more than 35% of surveyed foreign capital companies announced the expansion of their activities in Slovenia; in 2020, this share was 30.9%, which is slightly less than in the previous years. Outward FDI, however, has only modestly increased since 2014, following a decrease in 2010–2013. A more significant increase occurred only in 2019, but it was more or less followed by a stagnation in 2020, when the FDI stock was only 15.9% higher than in 2010. However, FDI inflows and outflows decreased significantly in 2020, following a previous drop in 2019 due to the outbreak of the COVID-19 epidemic.
Despite a relatively rapid growth of FDI inflows a few years before the outbreak of the epidemic, Slovenia remains among the EU Member States with the lowest inward FDI stock as a share of GDP. Although the inward FDI stock as a share of GDP rose to 35.9% by 2020, which was 13.3 p.p. more than the stock at the beginning of the global financial crisis (in 2008), Slovenia was still lagging behind the other new EU Member States according to this indicator. In this context, the significant increase in the share in 2020 compared to 2019 was almost exclusively a result of the fall in GDP due to the epidemic. Nevertheless, in 2009–2019, Slovenia recorded the highest increase in the inward FDI stock as a share of GDP among all new Member States. Among EU Member States, only Finland, France, Greece, Italy, Germany, Denmark and France had a lower share than Slovenia. Slovenia’s outward FDI stock as a share of GDP decreased from 16.8% in 2010, when it peaked, to 15.3% in 2020. Accordingly, Slovenia, among the new EU Member States, only lagged behind the Czech Republic, Hungary and Estonia, which had considerably higher shares.
16. R&D expenditure and the number of researchers
Expenditure on research and development (R&D) has been increasing over the last two years, but expressed relative to GDP, it still lags far behind the peak value reached in 2013. It achieved its highest nominal value in 2019 and accounted for 2.05% of GDP, but it has been below the EU average since 2016 (in 2019, the lag was 0.2 p.p.), with the lag behind the leading innovators even larger (in 2019: 0.6 p.p.). Investments in R&D decreased in 2012–2017. By consolidation of public finances, they first dropped in the public sector (by EUR 117 million or around 40% compared to 2011); their growth in the last three years has covered around 70% of this drop. In 2015–2017, investments in R&D also declined in the business enterprise sector, which nevertheless still remains the driving source of R&D expenditure growth. Its share in the total R&D expenditure in 2008–2019 was for the most part above 60%, which was higher than the EU average (in 2018: 59.1%; Slovenia in 2019: 61.5%) and higher than in the leading innovators (2017: 58.7%). In addition to low, especially public, R&D expenditure, insufficient cooperation and knowledge transfer between different sectors continues to be a problem, which is also reflected in the high level of self-financing of individual sectors' investments into R&D (see also IMAD, 2020e).
Growth in the number of researchers in 2008–2019 was only recorded in the business enterprise sector, where the majority of researchers is employed. In 2008–2019, the business enterprise sector employed 53.0% of researchers, while in the countries that are more successful in terms of innovation, this share was significantly higher (e.g. in Austria and Sweden by more than 10 p.p.). In 2019, the share of researchers in the business enterprise sector reached 60.7% (EU: 55.2%), and in the leading innovators it was even higher (66.3%). The trend of a several years of declining in the number of public sector researchers was halted in 2018, but their number is still 243 lower than the 2010 peak. The unattractive working conditions , also associated with the government's failure to meet its commitments in the innovation–research ecosystem , human resources problems can only be expected to intensify in the future.
17. Innovation activity of enterprises
The share of enterprises that introduced innovation in 2016–2018 returned to the level before the decrease in 2010–2016 but still remains below the EU average due to a noticeable lag of SME. In 2016–2018, innovation-active enterprises (IAEs) in Slovenia accounted for 48.6%, and their share was much higher in manufacturing and traditionally lower in selected services. The share of IAEs increased by 8 p.p. compared to the previous (2014–2016) period, while in the EU by only 0.8 p.p. According to the type of introduced innovation, 27.1% of enterprises simultaneously introduced product along with business process innovations involving elements of services, which reflects their strong interdependence and intertwining. 9.8% of IAEs introduced product innovation only, which was 4.3 p.p. above the EU average and above the average of most of the leading and strong innovators. Only slightly more IAEs, i.e. 10.3%, implemented only business process innovation, which was 6.4 p.p. below the EU average and is proof of the too slow digital transformation in Slovenia. Revenue from the introduced product innovations in Slovenia accounted for 12.3% of total revenues from sales of products; this share was higher in manufacturing (19.7%) and in certain services, e.g. computer services, which are the most dynamic in terms of innovation (21.9%). In those EU Member States that are more successful in terms of innovation (e.g. Belgium, Estonia and Finland), the revenue from the introduced innovations amounted to as much as two-fifths. In computer services, the revenues from innovations new to the market (and not just to the enterprise) were also the highest among the various activities of the Standard Classification of Activities. In Slovenia, their contribution accounted for almost a tenth of the total revenues from sales of products, which was also favourable in international comparison regarding our closest competitors (Estonia: 3.7%). The innovation activity of enterprises increases with their size, similarly as in the case of digitisation; the latest data on the IAE share show that in addition to small enterprises, medium-sized enterprises are also lagging behind the EU average, while large enterprises have maintained their leading position. A significant share of companies highlighted the impact of legislation on innovation in companies as a positive trigger for development, particularly in the fields of environment and consumer protection.
18. Intellectual property
Slovenia's long-standing lag behind the EU average in patents decreased significantly in 2020. According to provisional EPO data, Slovenian applicants filed 79 patent applications in 2020, the most in 2008–2020. About 30% were submitted in only three technological fields (biotechnology, chemical technology, and electrical machines, apparatus and energy) and about 10% in medical-related technologies. The latter have further consolidated their leading position in all technological fields concerning the patent applications with the EPO at the onset of the COVID-19 epidemic and achieved one of the largest annual growths (EPO, 2021). In terms of the level of patentability, measured by the number of first patent applications per million inhabitants, Slovenia maintained its leading position among the new EU Member States in 2008–2020. In 2008–2013, most of the first Slovenian patent applications were related to chemical technologies for human necessities (human medicine and veterinary medicine). This is associated with a significant share of pharmaceutical or chemical industry in Slovenia and its investments in R&D. The intensity of filing patent applications is also conditioned by the structure of the economy and the technologies used in individual sectors.
Significant progress has been made in trademarks since 2011, while designs still lag far behind the EU average. In EU trademark legal protection, the number of Slovenia’s applications per million inhabitants was mostly rising in 2008–2020. The high gap in the number of registered Community designs is associated with a lack of awareness of the importance of design to increase competitiveness. With a single application, applicants can ensure the legal protection of these two intellectual property rights throughout the EU. The costs are relatively lower and legal protection procedures are significantly faster than for patents, which affects their attractiveness among companies of all activities.
19. Corporate environmental responsibility
The COVID-19 epidemic and containment measures, which limited the operation of service activities in Slovenia and the EU in 2020, did not have a negative impact on the number of environmental certificates. The number of EMAS certificates and Ecolabels (per million inhabitants) remained unchanged in Slovenia in 2020 compared to 2019, while it increased in the EU. From spring to autumn 2020, the number of EMAS certificates increased both in Slovenia and in the EU (according to the European EMAS Helpdesk). The number of Ecolabels in tourist accommodation in the EU and Slovenia also increased, although tourism was among the most affected sectors in the COVID-19 epidemic, indicating great market interest in organic products and services (EC, 2020). The number of EMAS certificates and Ecolabels, despite the increase, is still much lower compared to ISO 14001 certificates. In 2019, the number of ISO 14001 certificates in Slovenia and the EU increased. Their number per million inhabitants in Slovenia remained higher than the EU average, but it was still quite far from the leading countries in this field. Compared to the new EU Member States, the number of the ISO 14001 certificates in Slovenia is also lower. The opposite is true for EMAS, which is much more widespread in Slovenia than in the new Member States. In order to promote participation in EMAS, Slovenia participated in the LIFE B.R.A.V.E.R project, which expired at the end of 2019 and which resulted in the adoption of five incentive measures for EMAS (IMAD, 2020e).
1. Trust in institutions
After several years of improvement, trust in most institutions decreased in 2020. It was the highest and above the EU average in 2006, but has dropped significantly since then. Trust in most institutions was the lowest at the end of the global financial crisis, while it improved in 2013–2019. Trust in political parties increased slightly only in 2017. Compared to the previous year, trust in the government, parliament and political parties decreased in 2020, which can be attributed to the deterioration of macroeconomic indicators due to the spread of the COVID-19 epidemic and, consequently, to the increased dissatisfaction of respondents with the economic and general situation in Slovenia. Satisfaction with democracy also declined. In Slovenia, the share of those who believe that the restrictions on human rights and freedoms introduced to contain the epidemic were unjustified was among the highest in the EU (30%). However, trust in local authorities has increased and this is still the institution people trust the most, while political parties are the least trusted institution. Trust in all institutions remained below the EU average in 2020 as well.
Trust in the EU and its institutions has increased since 2015. It was the highest in 2006 and the lowest in 2015, and has been rising again since then. In 2020, trust in the EU increased slightly compared to the previous year, as did trust in European institutions. In Slovenia, 47% of respondents trusted the EU, which is more than the EU average; 46% of respondents trusted the European Parliament and slightly fewer trusted the European Commission and the European Central Bank (44%), with all these shares also being around the EU average.
2. Executive capacity
The executive capacity indicator, which measures the strategic governance of public institutions, is gradually improving in Slovenia, but remains low compared to other EU Member States. The executive capacity indicator is a sustainable governance indicator measuring government and institutional performance in eight dimensions: strategic capacity, inter-ministerial cooperation, regulatory impact assessment, societal consultation, policy communication, the implementation of set measures, adaptability, and the capacity for reforming the public administration. Since 2017, the indicator value and Slovenia’s rank among the EU Member States have improved, but Slovenia continues to lag significantly behind the EU average in all indicator dimensions.
A low executive capacity score points to the relatively low values of the government and institutional performance indicators. In the SGI survey (Bertelsmann, 2020), the main weaknesses identified were in effective strategic planning and organisational reforms, where only limited progress has been made in recent years. The implementation of policy measures at various levels of government (both central and local) is also assessed as significantly worse than in other EU Member States. One of the issues is political interference in recruiting in the state administration, even at expert levels. Despite the progress made over the past year, Slovenia also lags behind other countries in producing a comprehensive assessment of the impact of proposed regulations (RIA) on public finances, the economy, the environment and society as a whole.
Executive capacity indicator by dimension, 2020
3. The Rule of Law Index
Slovenia ranks in the lower half of EU Member States according to data for 2019 on the Rule of Law Index; its ranking has not changed significantly since 2012. The rule of law highlights the principle of equality before the law and emphasises the inviolability of the authority of the law and rules. This means that the Government itself respects the law, that the functioning of government bodies is bound by law, and that fundamental human rights and freedoms are ensured. By being ranked in the lower half of EU Member States on the Rule of Law Index, Slovenia lags behind the SDS target. Its ranking points to weaknesses in adherence to the rule of law. Slovenia scores best in the category of order and safety, where it is close to the top-ranking Scandinavian countries. The only other category where it also ranks close to the EU average is fundamental rights, where it scores well on the right to life and security and labour rights indicators. On the other hand, it lags well behind the EU average in criminal justice, with indicators in this area reflecting mistrust in the justice system, particularly its independence. The weaknesses in adherence to the rule of law are also indicated by the low indicator values in the areas of constraints on government powers (e.g. the sanctions for official misconduct indicator) and the absence of corruption (e.g. the risk of corruption in the executive branch and in the legislature).
Rule of Law Index by sub-component, 2019
4. The expected time needed to resolve litigious civil and commercial cases
The expected time needed to resolve litigious civil and commercial cases shortened significantly in 2008–2018, but remains longer than in the EU. In 2008–2014, Slovenia shortened the expected time needed to resolve litigious civil and commercial cases by more than 40%, in large part due to the project to eliminate court backlogs and other structural reforms (e.g. insolvency legislation). Since 2014, the time needed to resolve these cases has increased slightly (to 283 days in 2018), mainly due to new competences given to the courts and the higher number of major cases. The gap with the EU has also widened, with court proceedings related to money laundering taking the longest compared to other countries. Meanwhile, the expected length of second- and third-instance proceedings – where Slovenia performs better than the EU average – has shortened. However, owing to the different data and methodology used in the calculation, the expected disposition time differs from the time actually taken to resolve a case.
The average actual disposition time for major cases has not changed significantly over the past five years, and in 2020 the COVID-19 epidemic had a significant impact on the functioning of the courts. Up to 2016, the time needed to resolve a major case was rapidly decreasing, largely as a consequence of a smaller incoming caseload and greater efficiency on the part of the courts, but this amount of time has not changed significantly since 2016. This can be attributed to the increasing number of more complex proceedings and new competences given to the courts by legislative amendments. The clearance rate for major cases exceeded 100% in 2016–2019, meaning that the courts resolved more cases than came in. With the COVID-19 epidemic, the number of all cases received (including major cases) decreased, as did the number of cases resolved. The courts were unable to resolve all cases brought before them due to the operating restrictions, thus resolving 5% fewer major cases than came in (there were 0.2% fewer cases overall). The share of pending major cases in the total number of unresolved cases has thus increased (by 46.9% in 2016 and 60.9 % in 2020). The average time needed to resolve a case has shortened significantly over the past five years, to 1.1 months in 2020.
5. The Corruption Perception Index
The perception of corruption has not changed significantly in the last nine years and remains higher than the EU average. The Corruption Perception Index (CPI) is based on the rate of public sector corruption as perceived by businesspeople, experts and analysts. Slovenia has made no significant progress in the corruption perception ranking since 2012, receiving the same score (60 out of the highest possible score of 100) for the third year in a row. This means that it continues to lag behind the EU average, but still ranks better than most countries that joined the EU after 2003. According to Eurobarometer (Eurobarometer 2020b), 87% of respondents think that corruption is widespread in Slovenia, but at the same time, a large majority of respondents have no personal experience of corruption. The high perception of corruption in Slovenia can to a great extent be attributed to respondents believing that high-profile and major cases of corruption are not adequately sanctioned. The Commission for the Prevention of Corruption meanwhile finds that the greatest amount of corruption in the public sector is perceived to exist in public procurement (around 15% of all incidences reported), in administrative procedures, in circumstances that represent a conflict of interest, in procedures regarding the disposal of physical assets owned by the government or municipalities, and in health care and pharmacy. The year 2020 was strongly marked by the COVID-19 epidemic and the ensuing crisis, which exposed a number of corruption risks, particularly in relation to the purchase of medical equipment. In 2020, some systemic changes were adopted in Slovenia (the adoption of an amendment to the Integrity and Prevention of Corruption Act), which are intended to provide tools enabling more efficient work of the Commission for the Prevention of Corruption and to delimit the power to prosecute criminal offences (ZIntPK-C, 2020).
6. Share of households reporting problems with crime, vandalism or violence in the local area
The share of households reporting problems with crime, vandalism or violence in the local area did not change in 2019 compared to the previous two years and is in line with the SDS target. It was 8% and remained below the EU average, but Slovenia's ranking among EU Member States deteriorated for the fourth year in a row. This shows that some other European countries have been more successful in reducing crime at the local level. The incidence of crime is affected by socio-economic factors, and crime is also more common in urban environments. In 2019, Jugovzhodna Slovenija stood out on this indicator. In this region, the share of households reporting problems with crime, vandalism or violence in the local area doubled over a ten-year period. The Posavska region also recorded a high and growing share of such households. Over a ten-year period, the share of such households fell the most in the Osrednjeslovenska region (by 10 percentage points), but remained above average in 2019 (12%). The Osrednjeslovenska region has the most urbanised areas in Slovenia, which increases the potential for crime. Important factors that contribute to a reduction in crime are a better quality of life for families in the community (the prevention and reduction of poverty and social exclusion), high quality implementation of educational work in schools, and more comprehensive organisation of social life and surveillance in the local community (Meško and Sotlar, 2012).
The quality of life is also affected by the feeling of being threatened in the immediate environment, but the share of individuals feeling unsafe remains low in Slovenia. In 2017, the majority of Slovenian respondents (97%) considered their immediate neighbourhood to be a secure place to live in (Eurobarometer, 2017). According to a Slovenian Public Opinion Poll conducted during the first wave of the COVID-19 epidemic, 95% of respondents in Slovenia felt safe when walking alone in their neighbourhood at night, which is slightly more than in previous years and may also be partly due to the restrictive measures to contain the spread of the virus.
7. The Global Peace Index
According to the Global Peace Index, Slovenia ranked among the most peaceful countries in the world again in 2020. In 2016–2019, it was one of the ten most peaceful countries in the world, and in 2020 it ranked 11th out of 163 countries in the world and 5th among the EU Member States. While Slovenia is once again among the ten best performing countries in the area of militarisation (4th) and ranks 12th in the area of societal safety and security, it scores lower in the area of domestic and international conflict (52nd), which is mainly due to the still slightly worse assessment of relations with neighbouring countries and the intensity of organised internal conflicts. While Slovenia has made progress in the area of domestic and international conflict (up eight places) compared with the previous year, its ranking has deteriorated (by four places) especially in the area of societal safety and security. In this area, it has also scored slightly lower over the past decade with regard to the indicators of the number of internal security officers and police per 100,000 people, the level of perceived criminality in society, and the likelihood of violent demonstrations. Compared with other countries, Slovenia nevertheless ranks relatively high in these areas too, but these scores indicate certain shortcomings that do not significantly affect the assessment of peace in the country. According to the Global Peace Index for 2020, Europe remains the most peaceful region in the world and is home to six of the ten most peaceful countries in the world (four of which are EU Member States). The Middle East and North Africa remain the least peaceful regions. Iceland remains the most peaceful country in the world, and Afghanistan the least. The Global Peace Index has deteriorated over the past decade, mainly due to the intensification of conflicts in the Middle East, terrorism, rising regional tensions in Eastern Europe and Northeast Asia, migration trends, and heightened political tensions in Europe and the United States, while new tensions and uncertainties have already been arising from the COVID-19 pandemic (IEP, 2020b).
8. Expenditure on official development assistance
In 2019, expenditure on official development assistance remained significantly lower than international commitments. Official development assistance is defined as aid provided by advanced countries in support of sustainable development in developing countries. In 2019, Slovenia allocated EUR 77.44 million for development assistance, 9% more than in 2018, thus maintaining the share of GNI dedicated for this purpose, which remained significantly below the EU average. Expenditure on official development assistance (0.16% of GNI) falls considerably short of international commitments, according to which Slovenia should strive to increase the share of GNI for this purpose to 0.33% by 2030.
Funds for paying the tuition fees of and scholarships for citizens from partner countries studying in Slovenia, as well as assistance focused on specific projects, made the greatest contribution to the increase in funds for official development assistance in 2019. In recent years, the level of aid has been strongly influenced by migration trends, especially in relation to the situation in the Middle East, which, with the exception of 2017, is reflected in the increased costs of caring for refugees and migrants in Slovenia. These decreased slightly in 2019, as did the dedicated contributions for specific programmes of international organisations, but both types of assistance still remain relatively high in terms of funding. Development assistance is the sum of multilateral assistance (funding provided for the regular development activities of international organisations) and bilateral assistance. In 2019, Slovenia again dedicated most of its bilateral aid to Western Balkan countries, 68% in total, which is the same as in 2018 and more than the average over the last five years (63%). Most of this aid was allocated to quality education projects (funds for paying tuition fees and scholarships). In 2019, expenditure on multilateral assistance also increased, of which the largest share (83%) was dedicated to EU development cooperation programmes.