The costs and benefits of Slovenian independence

Milan Cvikl, Evan Kraft and Milan Vodopivec

No 1126, Policy Research Working Paper Series from The World Bank

Abstract: One year is not enough time to draw conclusions about independent Slovenia's prospects, and it may not be easy for other countries to copy Slovenia's model. Slovenia is ethnically homogeneous, culturally and historically compatible with the West, and near (and somewhat protected from)friendly Western neighbors. And despite sharp political divisions, it has shown a political will to fight counterproductive redistribution. Still, Slovenia's experience may offer insights for other new post-Communist economies. Despite the obvious short-run costs of the brutal breakup of Yogoslavia's federal structure, Slovenia's medium- and long-run economic prospects are fairly good. Declining trade with the rest of Yugoslavia dims Slovenia's short-run prospects. But in the long run it may benefit from greater macroeconomic stability, freedom from subsidizing less-developed regions of Yugoslavia, and speedier integration with Western Europe. What has happened to Slovenia does not prove that separation necessarily improves welfare. In fact, had forces amenable to rational debate and compromise prevailed in Yogoslavia, Slovenia's secession might have decreased welfare. Slovenia's experience suggests that secession from a larger entity that is wrecked by political instability may produce economic benefits. Local autonomy gives Slovenia a chance to introduce a new currency and achieve macroeconomic stability, for example. This can work only if the local political constellation is not controlled by coalitions bent on preserving the old system of redistribution and is not hampered by major political divisions that paralyze decisionmaking. In short, secession can be beneficial if the new state is more homogeneous and functions more coherently than the old state. Not all newly independent states would face the costs Slovenia has faced. In the Czech-Slovak breakup, for example, political risk and refugee costs (or rather, the costs of migration) were much smaller than in Slovenia. Indeed, the Czech republic may also expect short-term costs but long-term gains.

Keywords: Environmental Economics&Policies; Economic Stabilization; Banks&Banking Reform; Economic Theory&Research; National Governance (search for similar items in EconPapers)
Date: 1993-04-30
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