Future GDP Growth in Slovenia: Looking for Room for Improvement

In a companion paper we project that it may still take a long time before Slovenia catches up with the EU in terms of real GDP per capita (see Jongen (2004)). In this paper we consider where there is still room for improvement in terms of GDP growth over the coming period by comparing various indices for Slovenia with those for the EU-15, the 10 accession countries, and the US. There does appear to be some room for improvement regarding the participation of older workers, tertiary education and capital-intensity. However, most of this room is filled in the base projection of Jongen (2004). Subsequently, we examine how much of the difference in GDP per capita is left after controlling for the difference in labor participation, human capital and physical capital, using international growth accounting. We find that controlling for differences in these inputs the gap with the EU-15 actually increases (our calculations further suggest that the TFP gap with the EU-15 remained almost the same over the period 1990-2000!). Although uncertainty about the quantity and quality of the inputs and the particular functional form of the production function may distort the picture, other factors do seem to play an important role in the gap to the EU-15 in GDP per capita. We consider some potential candidates next. We find that, relative to the EU-15, there is a gap in expenditures on (and perhaps quality of) research and development and the stock of inward foreign direct investment, both as a percentage of GDP. This may have hampered the exposure to technology in Slovenia. Furthermore, strict employment protection, explicit and implicit subsidies to unproductive firms and wage compression may have held back job and worker flows. This may hampered the adoption of technology in Slovenia. ∗CPB Netherlands Bureau for Economic Policy Analysis (CPB) and Institute for Economic Research (IER). Address: Institute of Macroeconomic Development and Analysis (IMAD), Gregorciceva 27, SI1000 Ljubljana, phone +386-1-4781028, fax +386-1-4781070, e-mail: [email protected]. I am grateful to Ivo Lavrač, Boris Majcen and Janez Šušteršič for comments and suggestions. Any remaining errors are my own. Opinions expressed in this paper are my own and do not necessarily coincide with the opinions of CPB or IER. All data, constructed series and graphs can be downloaded from www.gov.si