## REPUBLIC OF SLOVENIA — Selected Issues ## Source details **Canonical URL:** [REPUBLIC OF SLOVENIA — Selected Issues](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06250.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06250.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06250.pdf.json) --- ### Introduction and overview - Purpose: Provide background on key policy challenges for Slovenia in the euro-zone: dealing with an inflexible budget and inefficient spending, the effects of an aging population, encouraging labor participation, and strengthening competitiveness and long-term growth. - Euro adoption context: - Euro adoption in 2007 will place a premium on public expenditure flexibility and efficiency. - Main chapter focus areas: - Chapter II: Discretionary scope to adjust spending; steps to enhance budget flexibility; cross-country efficiency benchmarking for health, education, and social protection. - Chapter III: Long-run fiscal sustainability using generational accounting; impact of aging and pensions; cost of delaying reforms. - Chapter IV: Retirement incentives under the pension system (post-1999 reform); simulation suggests incentives to retire earlier than statutory full pensionable age. - Chapter V: Labor participation and incentives to work; calculation of Marginal Effective Tax Rates (METRs); recommendation that tax reform be simultaneous with benefit reform. - Chapter VI: Export competitiveness; technological and quality upgrading relative to New Member States (NMS). ### Budget rigidity and expenditure efficiency — key facts and targets - Fiscal pressures and targets: - Age-related spending estimated at 8 percent of GDP by 2050. - Medium-term fiscal strategy envisages an expenditure rationalization totaling 4 percent of GDP by 2012. - Stylized fiscal facts (2000-05): - Primary spending as a share of GDP was unchanged during 2000-05. - Cuts in capital transfers and intermediate consumption of 1.4 percent of GDP fully offset higher spending on subsidies, social benefits, and employee compensation. - Total spending averaged 48 percent of GDP during 2000-05 in Slovenia compared to an average of 42 percent of GDP in the NM-8 countries. - Tax burden and relative spending (2004–05): - Tax burden in Slovenia was over 40 percent of GDP in 2005. - Total spending was over 6 percent of GDP higher than the eight New Member States (NM-8) and 4 percent of GDP higher than the advanced EU-15 countries. - In 2004: social protection spending higher than NM-8 by 6.4 percent of GDP; health spending higher by 1.7 percent of GDP; education spending higher by 0.2 percent of GDP. - Non-discretionary share and volatility: - Non-discretionary spending in Slovenia is 72 percent of total spending (defined as social benefits, interest, compensation to employees and subsidies) versus 68 percent for NM-8 average. - Relative volatility ratio (primary spending volatility divided by output gap volatility): NM-8 average 2.7 (Primary Spending 2.4; Output Gap 0.9); EU-15 average 1.9 (Primary Spending 1.7; Output Gap 0.9); Slovenia 1.2 (Primary Spending 0.6; Output Gap 0.6). ### Definition and sources of budget rigidity - Definition used: Factors limiting discretionary scope to adjust spending within one to two fiscal years absent major structural reform or reopening of collective agreements (examples: quasi-autonomous spending units; financing mechanism for social services; wide coverage of social entitlements; inflexible collective agreements). - Main sectoral rigidities identified: - Health: quasi-autonomous legal status of hospitals; primary health clinics established by local governments with operating expenses covered by central government; annual collective bargaining determining scope and volume of services (80 percent of total health providers); DRG-based hospital transfers; capitation rules for primary care doctors. - Education: high share of compensation to employees (67 percent of education spending in Slovenia vs. 63 percent in NM-8); local governments establish primary schools while central government finances a significant share; primary funding based on departments/classrooms rather than per-capita; federal university transfers set by incremental-cost budgeting. - Social protection: wide coverage and weak targeting; pension benefits represent about three quarters of total social protection outlays; multiple and complex indexation rules; political resistance due to consensus-driven policymaking. ### Efficiency assessment methodology and caveats - Method: Data Envelopment Analysis (DEA) compares spending inputs and performance outcomes (e.g., mortality rates, standardized test scores, poverty risk) and constructs an efficiency frontier for health, education, and social protection. - Interpretation: Input-based technical efficiency score (bounded between zero and one) equals proportional reduction in spending consistent with efficient production of a given outcome. - Caveats: - DEA is highly sensitive to sample selection and measurement error; outliers strongly affect scores and frontier shape. - Focus on quantifiable inputs and outputs may overlook quality and unobserved factors (private spending, geography, initial GDP per capita). ### Box 1 — Key questions, findings and high-level recommendations 1. Is the historical pattern of spending adjustment sustainable? - Findings: - Adjustment relied on restraining flexible spending areas rather than reducing rigid social benefits, employee compensation and subsidies. - Unsustainable given envisaged adjustment scale and small share of flexible areas. - Recommendation: - Improve overall spending flexibility to facilitate medium-term expenditure rationalization on inefficient spending. 2. Does Slovenia spend efficiently compared to other EU and New Member States? - Findings: - Spending on health, education and social protection is relatively high and inefficient based on cross-country comparisons. - Sector-specific recommendations (examples preserved verbatim): - Health: - Reduce the broad basket of services covered by compulsory contributions. - Reorient voluntary insurance from covering co-payments to insuring tertiary and other health services. - Refine compensation mechanisms that encourage health care providers to economize resources. - Cautiously extend health clinic concessions to increase the share of private provision. - Education: - Move the funding formula for schools and universities to a per capita basis. - Implement a selective hiring freeze on primary teachers. - Seek greater cost recovery in preprimary child care and university tuition. - Social protection: - Strengthen targeting of transfers to reduce the risk of poverty by better focusing benefits on low-income households. 3. Does rigid structure of spending explain stability of expenditure? - Findings: - Stability largely reflects rigid structure of public spending rather than cyclical factors. - Recommendations: - Consolidate indirect budget users and fully integrate them in the budget process. - Better target the wide coverage and long duration of key social benefits. - Introduce more flexible work arrangements, such as fixed-term employment contracts. ### Health sector: efficiency findings and reform levers - Relative efficiency results (selected): - Child mortality: based on consolidated central government data, health spending attains the efficient frontier; based on general government data Slovenia ranks 18th out of 26 with efficiency score 0.68 (implying expenditure could be 32 percent lower for equivalent outcome). - Maternal mortality: Slovenia’s efficiency score 0.62, ranking 24th out of 26 countries. - Standardized death rates (SDRs): Slovenia ranks 19th out of 25 in reducing SDR from all causes with efficiency score 0.6. - Multiple-outcome model rank: Slovenia 18th out of 22. - Recommended measures: - Monitor hospital quality/safety indicators and gradually link performance to budget. - Continue reforms shifting operational risk to providers (DRG for hospitals; capitation for primary care). - Ensure proper DRG coding to realize efficiency savings. - Pharmaceutical and procurement reforms: - Establish reference price lists for “mutually interchangeable” drugs to save up to an estimated 10 percent of drug costs. - Centralize pharmaceutical and medical equipment procurement to save an estimated 10 to 30 percent. - Expand private concessions from local governments for primary health facilities (cautious design to ensure fees cover capital/depreciation and avoid contingent liabilities). - Restructure financing: review HIIS compulsory coverage and reorient VHIs from co-payments to excluded/tertiary services; permit VHIs to establish premiums based on risk attributes. ### Education sector: efficiency findings and reform levers - Primary education: - Slovenia spent about 2½ times more than the NM-8 countries on primary education spending per pupil as a share of GDP per capita (1998–2002, UNESCO). - Pupil-teacher ratio: Slovenia ranks 42nd out of 45 with efficiency score 0.21. - Secondary education: - TIMSS mathematics score about 5 percent lower than average for five NM-8 countries; spends almost 50 percent less than these countries in secondary spending per pupil as a share of GDP per capita. - Secondary education efficiency: efficiency score 0.46; rank 10 out of 19. - Tertiary education: - Efficiency score 0.58; rank 13 out of 44; proportion of graduates about 10 percent higher versus NM-8; tertiary spending per pupil 4 percent higher. - Multiple-outcome education model: Slovenia ranks 22nd out of 23 with efficiency score 0.69. - Recommended measures: - Formalize monitoring of outcome indicators and link to budget. - Pilot performance-based budgeting; link spending at individual school level to outcomes. - Primary-specific: trim teachers via natural attrition and selective hiring freeze; merge small primary schools; shift funding to per-capita formula. - Increase cost recovery in preprimary child care and university tuition with means-tested scholarships. - Encourage pooling resources and sharing teachers as school-age populations decline. ### Social protection: targeting and effectiveness - Findings: - Social protection transfers relatively large (over 18 percent of GDP during 2002–03 vs sample average 16.7 percent) but not associated with significantly lower risk of poverty before transfers. - In a sample of 26 countries Slovenia ranked 19th in efficiency of social protection outlays in reducing the proportion at risk of poverty. - Household survey evidence (2002, >1,100 individuals): - Earnings distribution by quintile largely unaffected by social protection transfers other than pensions. - Top income quintile receives 16 percent of total nonpension social benefits. - Recommendation: - Improve targeting of nonpension social benefits to low-income households and redirect savings to poverty reduction. ### Initial institutional and budget coverage steps to enhance flexibility - Consolidate indirect budget users (hospitals, schools, quasi-autonomous institutions) in the budget process. - Integrate performance-based budgeting to expand managerial flexibility and enable reallocations. - Review financing mechanisms for social services and harmonize indexation formulas (choose variables cautiously to minimize rigidities). - Accelerate flexible work arrangements (fixed-term contracts, part-time) particularly in civil service and primary education. ### Fiscal sustainability, demographic projections and model assumptions - Demographics and labor market: - Elderly dependency ratio projected to increase from around 23 percent in 2004 to over 60 percent in 2050. - Share of elderly above 80 years: nearly 19 percent of population aged over 65 in 2004, expected about 34 percent by 2050. - Population projected to decline starting around 2015. - Baseline model assumptions (verbatim preservation): - Labor productivity growth assumed to decline to 3 percent by 2008 and, in the baseline case, stay at 3 percent over the long run. - Labor force participation assumed to stabilize at 73.6 percent in the long run. - Unemployment rate assumed to be lowered to 5.4 percent. - Long-run employment growth with declining working-age population translates into negative employment growth of -0.7 percent over the long run. - GDP growth gradually declines and stabilizes around 2.5 percent. - Discount rate assumed to be 4 percent (based on average nominal interest rate on public debt of around 7 percent and a long-run inflation rate of 3 percent). - Fiscal projections (baseline): - Pension expenditures projected to rise from 11 percent of GDP in 2005 to almost 16 percent of GDP in 2050. - Primary deficit and net debt projected to reach around 10 and 300 percent of GDP, respectively, by 2050 in the baseline. - Net debt projected to reach 60 percent of GDP by 2030 and accelerate thereafter. - Intertemporal fiscal sustainability gap (NPV over next 150 years) corresponds to around 10 percent of GDP. - Permanent fiscal adjustment needed to reach a target debt-to-GDP ratio of 60 percent by 2050 is nearly 5 percent of GDP. ### Sensitivity, timing, and cost of delay - Sensitivity and scenario variants (Intertemporal Fiscal Gap, in percent of GDP): - Baseline scenario: 10.2 (Productivity growth (3%) and interest rate (4%)) - Higher productivity growth (3.5%): 12.5 - Lower productivity growth (2.5%): 10.5 - Lower interest rate (3.5%): 17.1 - Higher interest rate (4.5%): 7.9 - Cost of delay: - If tax or expenditure adjustment is delayed by one year, additional adjustment needed to close the fiscal gap would rise by 1/8 percent of GDP. - A 10 to 15 year window exists to implement additional reforms to ensure long-term debt sustainability; delaying increases adjustment burden. ### Pension system, reform scenarios and intergenerational implications - Pension system structure and 1999 reform notes: - Mandatory, defined-benefit, pay-as-you-go public pension insurance and voluntary supplemental pension system. - In 2005, expenditure on pensions stood at 10.7 percent of GDP. - 1999 reform phased in by 2024 included lowering accrual rate from 85 percent to 72.5 percent for full pension service years; lengthening assessment period from 10 to 18 best consecutive years; increasing full pensionable retirement age to 63 for men and 61 for women with minimum 20 years service. - After reforms fully phased in, net replacement rate envisaged to stand at 56 percent of wages; average net replacement rate close to 70 percent in 2005. - Pension reform alternative scenarios (summarized outcomes): 1. Higher retirement age (average effective age from 61 to 63): reduction of over 2 percent of GDP by 2050 relative to baseline. 2. Lower replacement rate (entry net replacement rate lowered to 52 percent): pension expenditure still high at over 13.5 percent of GDP. 3. Price indexation of existing pensions: lowers pension expenditure to 8.0 percent of GDP through 2025; subsequently rises to 11 percent by 2050. 4. Combined scenario (higher retirement age + lower entry net replacement rate): pension expenditure contained at around 11 percent of GDP over next 50 years. - Integrated reform impact on intertemporal fiscal gap and generational balance (In percent of GDP): - Baseline Intertemporal fiscal gap: 10.2; Combined reform scenario: -0.3. - Contribution to Intertemporal Fiscal Gap reductions (selected): Tighter non-age related spending 3.1; Extended retirement age 5.7; Lower net replacement rate 6.2; Lower pensions indexation 4.1; Tighter health care spending 6.4. - Interpretation: - Closure of fiscal gap requires integrated package: lower net replacement rate, extended retirement age, containment of non-pension (health and other) spending. - Reforms that restore sustainability can shift burdens across generations; early implementation minimizes burden on future generations. ### Retirement incentives — simulation methodology and main results - Method: Social Security Wealth (SSW) accrual method and forward-looking peak/option-value measures; pension base computed from 18 best consecutive years with valorization linked to pension indexation rules. - Baseline worker assumptions (selected, verbatim where given): - Hypothetical male joins labor force at age 24; eligible for full pensions at age 63; working period 40 years. - Wages grow annually at the same rate as economy-wide average wages—5 percent; real wages grow at 2.5 percent; inflation at 2.5 percent; seniority increment rate of 1 percent. - Valorization of past earnings set equal to average economy-wide wage growth in the baseline; sensitivity test uses alternative implicit valorization tax rate of 0.77 percent. - Synthetic net wage: pension base uses a synthetic net wage equal to about 63 percent of the gross wage. - Baseline discount rate: 3 percent. Pension benefits indexed to nominal wage increases every year in baseline. - Main findings on incentives and optimal retirement age: - Strong incentives for men to retire early under baseline parameters. - Selected implicit tax values (baseline implicit tax, men, preserved exactly from text): - Age 58: -34.62 - Age 59: -21.74 - Age 60: -9.33 - Age 61: 2.53 - Age 62: 13.72 - Age 63: -5.64 - Age 64: 12.38 - Age 65: 28.73 - Maximum pension wealth accrued at age 61 in baseline, implying stated incentives to retire up to two years before full pensionable age. - Sensitivities: - Higher life expectancy (to 81) shifts optimal retirement toward age 65 in example; increasing life expectancy by 4 years can remove motivation for early retirement. - Higher discount rate (5 percent) can advance optimal retirement age to about age 60. - No seniority increment moves optimal retirement forward to 60. - Indexation matters: wage indexation yields strongest early-retirement incentives; price indexation weakens them and can shift optimal retirement to age 62. - Back-loading accrual rates raises effective retirement age (example back-loaded schedule raises optimal retirement to 62). - Distributional effects: - Incentives to retire early particularly strong for low- and high-wage earners due to minimum pension base and progressive effective tax schedule. ### Policy implications from retirement-incentive analysis - Current pension parameters encourage early exits despite 1999 reforms; recommended options to raise effective retirement age include: - Reform penalty and bonus rates. - Back-load accrual rates (shift accrual toward later career years). - Consider price indexation or reduced wage indexation to weaken wealth effect. - Increase assessment period for pension-base calculation to lower expenditure without encouraging earlier retirement. - Careful coordination if raising statutory retirement age, since other parameters can offset intended effects. ### Labor participation, METRs and tax-benefit reform options - Diagnosis: - High METRs at the lower end of income distribution contribute to weaker labor participation, particularly among groups with poor-income prospects. - Benefit-side proposal: - Leave GMI unchanged (currently amounting to 71 percent of minimum UB). - Reduce unemployment assistance (UA) to half the minimum UB from current ratio of 80 percent; make UA a temporary support with shorter statutory duration. - Tax-side proposal (three-rate system): - Maintain social security contributions at current rate 22.1 percent for all labor income. - Taxable income brackets and rates: - 0–minimum wage (42 percent of the average wage): 15 percent - Minimum wage – 2 average wages: 20 percent - Above 2 average wages: 25 percent - Expected impacts of combined reform (three-rate system + reduced UA): - Strengthened job-search incentives for low-income individuals. - Decline in number of UA recipients. - Reduction in METRs for most people relative to current system and for most low-income individuals relative to flat tax proposal. - METRs could remain up to 40 percent in some cases; further calibration of benefits and exemptions recommended. - Comparative finding: - A hypothetical 20 percent flat tax with unchanged benefits would worsen work incentives for individuals with poor-income prospects. - The three-rate system generally delivers lower METRs for incomes up to the average wage and lowers average effective tax rates for most people. ### Export competitiveness: technological and quality upgrading - Context: - Slovenia faces competitiveness challenges due to high income level and loss of exchange rate instrument; quality upgrading and specialization in higher-value-added niches are important. - Specialization and RCA findings (1994–2004): - Specialization in technology-intensive and skilled-labor-intensive goods; together account for around two-thirds of exports to EU-15. - RCA for technology-intensive exports greater than 1 since 2003. - Slovenia increased share of high-technology goods in exports, but increase smaller than most other emerging markets. - Quality proxy and UVR methodology: - Quality proxied by unit value ratios (UVRs): UVR_{i,j} = UV_{i,j} / UV_{i,world}, computed at six-digit HS level and aggregated with current-year weights (2000 used for constant-weight checks). - Caveats: UVR increases can reflect quality upgrading or price inflation; constant-weight and volume checks used. - Empirical findings: - Positive change in Slovenia’s country-level UVR between 1994 and 2004, but pace lags EU-8, especially in high-technology exports. - Regression evidence: - Strong catch-up effect: countries with smaller initial market shares or lower initial UVRs grow faster. - For emerging markets, UVR increases positively associated with market-share gains. - FDI and trade openness generally positively related to UVR growth (market linkages and spillovers). - REER appreciation not a robust driver of UVR growth. - Slovenia-specific diagnostics and indicators (2000–04, preserved entries): - Slovenia: FDI 2.3 (Percent of GDP), R&D 1.5 (Percent of GDP), US Patents 1865 (Total), School enrollment, tertiary 17 (In percent of Gross), Labor force with tertiary education 6.3 (In percent of total), Manufacturing Productivity Growth, 2000-04 1 (In percent). - EU-8 average: FDI 5.0, R&D 0.8, US Patents 1654, School enrollment, tertiary 23, Labor force with tertiary education 7.8, Manufacturing Productivity Growth 3.7. - EU-15 average: FDI 4.6, R&D 2.0, US Patents 1,951, School enrollment, tertiary 60.2 (table formatting in source), Labor force tertiary 10.0. - Interpretation: - Despite higher R&D spending than CECs, Slovenia produced fewer commercial patent applications and has lower FDI as percent of GDP versus EU-8 and EU-15 averages. - Weak market linkages (lower FDI, weaker translation of R&D into patents, lower absorption of tertiary-educated labor) likely contributed to slower quality upgrading. - Policy recommendations for competitiveness: - Strengthen market linkages: create more conducive environment for FDI to raise knowledge spillovers. - Enhance mechanisms to convert R&D spending into commercial applications (patents, product development). - Improve labor-market absorption of tertiary-educated workers into productive roles. - Tailor policies recognizing sectoral heterogeneity; conduct disaggregated industry-level analysis. ### Conclusions — integrated policy priorities - Core assessment: Public spending in Slovenia is relatively inflexible, inefficient and poorly targeted; demographic aging will exert significant fiscal pressures. - Immediate and medium-term policy priorities: - Increase short-term budget flexibility to allow targeted reductions in relatively inefficient spending areas. - Use efficiency benchmarking (DEA) across and within sectors to guide resource reallocation. - Implement sectoral reform levers in health, education and social protection (see sectoral recommendations above). - Consolidate indirect budget users into central budget oversight and adopt performance-based budgeting. - Pursue integrated pension and nonpension reforms to contain pension and health spending growth: extend effective retirement age; reduce net replacement rates; consider price indexation; contain non-age-related spending growth. - Strengthen labor-market incentives through coordinated tax-benefit reform (e.g., three-rate personal income tax proposal combined with benefit-side changes) to raise labor participation. - Enhance export competitiveness by strengthening FDI, translating R&D into commercial outputs, and improving labor-market absorption of tertiary graduates. - Timing: Early and comprehensive action is warranted; delaying reforms raises required adjustment and shifts burden to future generations. *Prepared by J. Fernández-Ansola, Philippe Egoume-Bossogo, Anita Tuladhar, Mercy Mathibe (all EUR), and Todd Mattina and Victoria Gunnarsson (both FAD); Approved by European Department; June 13, 2006. Source: _cr06250 (IMF staff report excerpts).* ### 2006. The views expressed in this document are those of the staff team and do not necessarily reflect ### REPUBLIC OF SLOVENIA — Selected Issues ### Introduction and overview - Purpose: Provide background on key policy challenges for Slovenia in the euro-zone: dealing with an inflexible budget and inefficient spending, the effects of an aging population, encouraging labor participation, and strengthening competitiveness and long-term growth. - Euro adoption context: - Euro adoption in 2007 will place a premium on public expenditure flexibility and efficiency. - Main chapter focus areas: - Chapter II: Discretionary scope to adjust spending; steps to enhance budget flexibility; cross-country efficiency benchmarking for health, education, and social protection. - Chapter III: Long-run fiscal sustainability using generational accounting; impact of aging and pensions; cost of delaying reforms. - Chapter IV: Retirement incentives under the pension system (post-1999 reform); simulation suggests incentives to retire earlier than statutory full pensionable age. - Chapter V: Labor participation and incentives to work; calculation of Marginal Effective Tax Rates (METRs); recommendation that tax reform be simultaneous with benefit reform. - Chapter VI: Export competitiveness; technological and quality upgrading relative to New Member States (NMS). ### Budget rigidity and expenditure efficiency in Slovenia — key themes and findings - Fiscal pressures and targets: - Age-related spending estimated at 8 percent of GDP by 2050. - Medium-term fiscal strategy envisages an expenditure rationalization totaling 4 percent of GDP by 2012. - Definition of budget rigidity in this analysis: - Factors limiting discretionary scope to adjust spending within one to two fiscal years absent major structural reform or reopening of collective agreements. - Examples: quasi-autonomous spending units (e.g., hospitals and schools), financing mechanism for social services, wide coverage of social entitlements, inflexible collective agreements. - Efficiency assessment methodology: - Uses Data Envelopment Analysis (DEA) to compare spending inputs and performance outcomes (e.g., mortality rates, standardized test scores, poverty risk) and construct an efficiency frontier for health, education, and social protection. - Relative notion of technical efficiency used as a tool to identify potential spending reductions that do not sacrifice outcomes. - Stylized fiscal facts: - Primary spending as a share of GDP was unchanged during 2000-05. - Cuts in capital transfers and intermediate consumption of 1.4 percent of GDP fully offset higher spending on subsidies, social benefits, and employee compensation. - Spending reductions were concentrated in categories that represent a relatively small share of total spending. ### Box 1 — Summary of key questions, findings, and recommendations 1. Is the historical pattern of spending adjustment sustainable over the medium term? - Findings: - Expenditure adjustment has relied on restraining traditionally flexible spending areas rather than reducing rigid social benefits, employee compensation and subsidies. - This approach will not be sustainable given the envisaged scale of adjustment and small share of traditionally flexible areas. - Recommendations: - Improve overall spending flexibility to facilitate medium-term expenditure rationalization on inefficient spending rather than rely on continued restraint in capital investment and other goods and services. 2. Does Slovenia spend efficiently compared to other EU and New Member EU States? - Findings: - Spending on health, education and social protection is relatively high and inefficient based on a cross-country comparison of spending inputs and outcomes, suggesting there is scope to trim spending without sacrificing the quality of public services. - Recommendations (sector-specific): - Health sector: - Reduce the broad basket of services covered by compulsory contributions. - Reorient voluntary insurance from covering co-payments to insuring tertiary and other health services. - Refine compensation mechanisms that encourage health care providers to economize resources. - Cautiously extend health clinic concessions to increase the share of private provision. - Education sector: - Move the funding formula for schools and universities to a per capita basis to encourage the rationalization of excess capacity. - Implement a selective hiring freeze on primary teachers. - Seek greater cost recovery in preprimary child care and university tuition. - Social protection: - Strengthen targeting of transfers to reduce the risk of poverty by better focusing benefits on low-income households. 3. Does the rigid structure of public spending explain the observed stability of expenditure? - Findings: - Relative stability of spending largely reflects a rigid structure of public spending rather than cyclical factors. - Main rigidities: quasi-autonomous institutions, the financing mechanism for social services, wide coverage of social benefits, rigid collective agreements. - Recommendations: - Consolidate indirect budget users and fully integrate them in the budget process to strengthen control over spending. - Better target the wide coverage and long duration of key social benefits to low-income households. - Introduce more flexible work arrangements, such as fixed-term employment contracts. ### Policy implications and initial steps for expenditure rationalization - Strategic priorities: - Increase short-term budget flexibility to allow targeted reductions in relatively inefficient spending areas rather than across-the-board cuts. - Use efficiency benchmarking (DEA) across and within sectors (e.g., primary versus secondary education) to guide resource reallocation. - Sectoral reform levers (examples drawn from DEA findings): - Health: redefine compulsory coverage, redesign voluntary insurance roles, reform provider compensation, consider selective private provision. - Education: per capita funding to rationalize capacity, hiring freezes where appropriate, increase user cost recovery for certain services. - Social protection: improve targeting to low-income households to enhance poverty-reduction efficiency. - Institutional reforms: - Integrate quasi-autonomous units into central budget oversight. - Review financing mechanisms for social services to reduce automatic spending pressures. - Address collective bargaining and employment contract rigidities to increase short-run adjustability. *Prepared by J. Fernández-Ansola, Philippe Egoume-Bossogo, Anita Tuladhar, Mercy Mathibe (all EUR), and Todd Mattina and Victoria Gunnarsson (both FAD); Approved by European Department; June 13, 2006.* ### 12. High taxes and the small share of flexible spending limit the scope to ### _cr06250 - 12. High taxes and the small share of flexible spending limit the scope to ### Overview - Tax burden in Slovenia was over 40 percent of GDP in 2005. - Total spending was over 6 percent of GDP higher than the eight New Member States (NM-8) and 4 percent of GDP higher than the advanced EU-15 countries (Figure 2). - The relatively small share of traditionally flexible spending limits the scope for rapid expenditure restraint. - Section C of the source identifies potential budget rigidities and outlines initial steps to enhance spending flexibility. ### Expenditure levels and composition (2000-05) - Total spending averaged 48 percent of GDP during 2000-05 in Slovenia compared to an average of 42 percent of GDP in the NM-8 countries. - Main drivers of higher average spending in Slovenia: generally rigid social benefits and employee compensation. - In 2004: - Social protection spending was higher in Slovenia than the NM-8 average by 6.4 percent of GDP. - Health spending was higher than the NM-8 average by 1.7 percent of GDP. - Education spending was higher than the NM-8 average by 0.2 percent of GDP. - In 2004, employee compensation represented: - 38 percent of health spending in Slovenia compared to 31 and 28 percent in the NM-8 and EU-15 countries, respectively. - 67 percent of education spending in Slovenia compared to 63 percent in the NM-8 countries. ### Stability of spending and nondiscretionary share - Spending appears relatively stable in Slovenia compared to other EU countries. - Examples of lower volatility (2000-05): - Social benefits in the NM-8 countries exhibit almost twelve times the variation of Slovenia (coefficient of variation; Table 1). - Total expenditure and employee compensation in the NM-8 countries are over three times as volatile as in Slovenia. - Non-discretionary spending in Slovenia is 72 percent of total spending (defined as social benefits, interest, compensation to employees and subsidies). - This compares with nondiscretionary spending in the NM-8 countries of 68 percent of total spending on average. ### Cyclical variation in spending - Output gaps have been relatively stable in Slovenia compared to other EU countries, contributing to reduced cyclical variation in spending. - Relative volatility ratio (primary spending volatility divided by output gap volatility): - NM-8 average: 2.7 (Primary Spending 2.4; Output Gap 0.9) - EU-15 average: 1.9 (Primary Spending 1.7; Output Gap 0.9) - Slovenia: 1.2 (Primary Spending 0.6; Output Gap 0.6) - Simulation holding Slovenia’s volatility ratio at 1.2 but setting output gap volatility equal to the NM-8 average of 0.9: - Simulated Slovenia primary spending volatility: 1.0 (Output Gap 0.9; Relative Volatility 1.2) - Under this simulation, variation in primary spending in Slovenia would have been higher by more than 50 percent but would remain less than half as volatile as the actual NM-8 average. - Conclusion: Smoother growth performance alone is insufficient to explain Slovenia’s spending stability; other factors (budget rigidities) are needed. ### Budget rigidities by sector - Health - Medium-term HIIS strategy envisaged an upper threshold in public health spending of about 6.9 percent of GDP over the medium term; this discretionary target anchored the health budget. - Apparent stability of health spending masks compositional changes, some linked to a shift in accounting of pharmaceutical expenses. - Sources of rigidity limiting discretionary trimming: - Quasi-autonomous legal status of hospitals. - Primary health clinics established by local governments with operating expenses (including wages) covered by the central government. - Annual collective bargaining determines scope and volume of services for public health care providers (80 percent of total health care providers). - Hospital transfers based on collectively agreed rates via Diagnosis-Related Groups (DRGs) system. - Compensation scheme for primary care doctors depends on a collectively agreed capitation rule adjusted for factors such as age. - These funding and compensation mechanisms limit short-term discretionary scope without reopening collective agreements or adjusting compensation rates. - Education - High share of compensation to employees constrains discretionary scope to adjust short-term education spending. - Institutional and funding rigidities: - Local governments establish primary schools while the federal government finances a significant share of operational and employment costs. - Primary school funding generally based on the number of departments or classrooms rather than a per-capita based formula linked to average cost of service delivery. - Secondary school funding is gradually shifting toward per capita based formula but constraints remain. - Federal transfers to universities are set according to an incremental-cost budgeting formula, constraining discretionary room to adjust spending. - Social protection transfers - Wide coverage and weak targeting compared to other EU countries represent major rigidities. - Pension benefits represent about three quarters of total social protection outlays, adding rigidity because pension reforms typically reduce spending with a long lag. - Wide coverage of poorly targeted social benefits weakens counter-cyclicality of spending. - Political resistance is a significant constraint to reducing generous social entitlements given Slovenia’s consensus-driven policymaking. - Multiple and complex indexation rules have contributed to social spending rigidity, creating different real benefit levels and higher administrative costs. - Recent proposal to harmonize and rationalize the number of indexation formula is identified as a welcome step; choosing variables cautiously is advised to minimize rigidities. ### Initial steps and implications (as identified in the source) - Section C outlines initial steps to enhance spending flexibility; specific steps mentioned in the text include: - Addressing potential budget rigidities in institutions, financing mechanisms, social protection, and employee compensation. - Harmonizing and rationalizing the number of indexation formula for social benefits (noting prudence in selecting variables to minimize rigidities). - The analysis emphasizes that some discretionary policies to maintain stable spending may be observationally equivalent to budget rigidity; reforms should consider trade-offs between short-term budget flexibility and potential efficiency or equity rationales for existing arrangements. *Source: _cr06250 - 12. High taxes and the small share of flexible spending limit the scope to (IMF staff report text).* ### 26. The strong collective bargaining tradition in Slovenia imposes a major rigidity ### 26. The strong collective bargaining tradition in Slovenia imposes a major rigidity ### Civil service rigidities and wage structure - The civil service grew by one-third during 1992-2004. - One study estimated that the average wage is 34 percent higher than comparable private sector wages (Kastelec, 2005). - Stronger job security in the civil service typically allows for a discount of 10-20 percent relative to private sector wages. - Centralized personnel management features that add rigidity: - fixing the number of civil service positions; - centralizing pay scales; - effectively providing tenure to civil servants. - Seniority-based career advancement introduces an upward bias in the wage bill as the civil service ages. - Davies, Verhoeven, and Gunnarsson (2006) demonstrated that wages and salaries are not inherently rigid to adjustment, suggesting scope to reduce the wage bill significantly over the medium term. ### Initial steps to enhance budget flexibility (measures listed) - Implementing institutional reforms: - Consolidating indirect budget users such as hospitals and schools in the budget process to enhance government ability to contain costs. - Reforming social services financing: - Shift education financing at all levels increasingly towards per capita based formula to penalize spending units with high relative costs. - Targeting social benefits: - Improved targeting would direct additional resources to low-income households while fostering greater counter cyclicality in overall expenditure. - Review long duration and wide coverage of social benefits. - Accelerating flexible work arrangements: - Increase flexible and part-time employment arrangements in the civil service. - Example: fixed-term contracts in primary education could facilitate medium-term consolidation given the declining primary school-age population and excess number of teachers. - Adopting performance-based budgeting: - Implement performance-based budgeting to expand managerial flexibility in reallocating inputs to better achieve performance targets. ### Intergovernmental fiscal relations and budget coverage - Institutional reforms and revised funding for social services may require review of intergovernmental fiscal relations and budget coverage. - Indirect budget users with multiple revenue sources and quasi-autonomous legal status should be consolidated and integrated in the state and local budget process as appropriate. - Delineation of spending units to either the state or local budget should be consistent with inter-governmental expenditure assignments and the financing mechanism, which might need updating. - The planned review of the Budget System Law is a possible modality to address this issue. - Federal government should proceed cautiously to minimize potential service disruption. ### Methodology: Assessing efficiency to guide expenditure rationalization - Efficiency assessed using a cross-country approach via Data Envelopment Analysis (DEA) (Farrell, 1959; Charmes, Cooper, and Rhodes, 1978). - DEA constructs a piecewise linear “efficiency frontier” from efficient input-output combinations; input-based technical efficiency score bounded between zero and one equals proportional reduction in spending consistent with efficient production of a given outcome. - This chapter limits focus to input-based efficiency scores for medium-term expenditure rationalization. - Caveats of DEA: - Highly sensitive to sample selection and measurement error; outliers can strongly affect scores and frontier shape. - Focuses on quantifiable inputs and outputs and may overlook harder-to-measure factors such as quality. - Important to compare spending inputs with outcomes actually targeted by policymakers. - Private spending differences and exogenous factors (e.g., geography, initial GDP per capita) can bias results. - Relevant literature findings summarized: - Gupta and Verhoeven (2001): significant inefficiencies in African education spending (37 countries, 1984-95). - Afonso and St. Aubyn (2004): low public spending countries can overperform higher-spending countries in outcomes (OECD). - Herrera and Pang (2005): (i) high-spending countries appear less efficient; (ii) large wage bill countries perform less efficiently; (iii) higher aid dependency yields lower efficiency. - Afonso, Schuknecht and Tanzi (2006): applied DEA to emerging market and EU countries and used Tobit regressions to control for exogenous factors. ### Relative efficiency of public health spending in Slovenia — child and maternal mortality - Child mortality: - Based on consolidated central government data, health spending attains the efficient frontier in reducing child mortality compared to other EU countries. - Based on general government data and broader sample, Slovenia ranks 18th out of 26 countries with an efficiency score of 0.68, implying expenditure could be 32 percent lower and achieve an equivalent outcome. - Efficiency frontier shows sharply decreasing returns to scale once health spending exceeds about 5 percent of GDP. - Maternal mortality: - Average maternal mortality rate in the EU-15 is 42 percent lower than in Slovenia even though public health spending is comparable at 6.3 to 6.4 percent of GDP. - Maternal mortality is 20 percent lower than the NM-8 average, while average public health spending in Slovenia is higher by almost 30 percent. - Slovenia’s efficiency score is 0.62, ranking it 24th out of 26 countries in the sample. - Note: maternal mortality measured per 100,000 births; about 18,000 births each year in Slovenia so a single outlier can significantly affect the rate. ### Standardized death rates (SDRs) and multiple-outcome health model - SDRs: - Slovenia ranks 19th out of 25 countries in reducing SDR from all causes with an efficiency score of 0.6. - SDR from all causes is about 15 percent higher in Slovenia compared to the EU-15 average while health spending is comparable as a share of GDP. - SDRs in Slovenia from circulatory and digestive disorders are 20 and 80 percent higher than the EU-15 average, respectively. - SDR from all causes is about 20 percent lower in Slovenia than the NM-8 average, while public health spending is about one-third higher. - Multiple-outcome model (child and maternal mortality rates, SDR from all causes, years of healthy life expectancy): - Slovenia ranks 18th out of 22 countries. - Table 4 shows nine countries identified as relatively efficient; both low-spending/low-outcome and high-spending/high-outcome countries can be efficient. - Results imply outcomes could be strengthened in Slovenia or spending could be significantly reduced while remaining consistent with current outcome indicators. Key entries from Table 4 (as presented) - Slovenia: Maternal mortality 175 (per 100,000); Child mortality 68.2 (per 1,000); Healthy life expectancy 59.5 (years); SDR: all causes 6.4 (per 100,000); Health spending 0.72 (percent of GDP); Efficiency Score Rank 18. - Selected other entries for context (as presented): - Latvia: Efficiency ScoreRank 1; Health spending 3.2 (percent of GDP); Efficiency Score 1.00 - Netherlands: Health spending 4.0 (percent of GDP); Efficiency Score 1.00 - Poland: Health spending 4.3 (percent of GDP); Efficiency Score 1.00 - Sweden: Health spending 6.5 (percent of GDP); Efficiency Score 1.00 - France: Health spending 7.7 (percent of GDP); Efficiency Score 0.68; Rank 19 - Slovak Republic: Health spending 6.8 (percent of GDP); Efficiency Score 0.63; Rank 22 Sources for the table: World Health Organization and Eurostat data; Fund staff estimates. ### Enhancing health sector efficiency (recommended measures) - Extend existing initiatives: - Monitor quality and safety indicators of hospital service delivery and gradually link performance to the budget process. - Continue reforms shifting operational risk to providers (DRG system for hospitals; capitation for primary health care) to incentivize economizing resources. - Ensure hospitals properly input and code diagnoses in the DRG system to yield additional efficiency savings. - Pharmaceutical and procurement reforms: - Establish reference price lists for “mutually interchangeable” drugs to save up to an estimated 10 percent of drug costs. - Centralize pharmaceutical and medical equipment procurement to benefit from bulk buying to save an estimated 10 to 30 percent. - Expand private concessions: - Expand private concessions from local governments of primary health facilities to enhance competition and lower costs, with cautious design to ensure fees cover capital and depreciation costs and avoid contingent liabilities for government. - Restructure health care financing: - Review the system of compulsory public insurance by the Health Insurance Institute of Slovenia (HIIS) and voluntary health insurers (VHIs). - Current co-payments ranging from 15 to 95 percent of the cost of services are covered by the VHIs; over 90 percent of the population is covered by voluntary co-payment insurance, so co-payments have not effectively rationalized demand. - Private insurance acts effectively like an arm of compulsory HIIS as it sets premiums based on earnings. - Future reforms should include: - Reviewing the broad coverage of basic benefits covered by the HIIS. - Reorienting the coverage of voluntary health insurance from co-payments to excluded services from the publicly provided basket, tertiary services, dental care and pharmaceuticals so out-of-pocket co-payments better rationalize excess demand. - Permitting VHIs to establish insurance premiums based on risk attributes to strengthen efficiency (Tajnikar and Bonča, 2005). ### Relative efficiency of public education spending — primary education - Primary education spending appears particularly inefficient in Slovenia. - Slovenia spent about 2½ times more than the NM-8 countries on average based on UNESCO data for primary education spending per pupil as a share of GDP per capita during 1998-2002. - Part of higher spending could reflect inclusion of preprimary child care costs not included in other country data. - Higher primary school spending also reflects excess primary school teachers and facilities not matched to the declining primary school-age population, resulting in high overhead costs. - In terms of the average pupil-teacher ratio, Slovenia ranks 42nd out of 45 countries with an efficiency score of 0.21, indicating that higher spending has not produced a significantly lower pupil-teacher ratio. *Source: IMF staff report excerpt — “26. The strong collective bargaining tradition in Slovenia imposes a major rigidity.”* ### 39. Secondary education also appears relatively inefficient in terms of international ### _cr06250 - 39. Secondary education also appears relatively inefficient in terms of international ### Secondary education: performance and spending - Slovenia achieved an average score on the TIMSS standardized test in mathematics that was about 5 percent lower than the average for five NM-8 countries with available test score data. - Slovenia spends almost 50 percent less than these same countries in terms of secondary school spending per pupil as a share of GDP per capita. - Secondary school funding per pupil is just 20 percent of the respective primary education amount. - Secondary education efficiency: Slovenia generated an efficiency score of 0.46 and ranks 10th out of 19 countries in the sample. - Note: The pupil-teacher ratio is used as a proxy for an outcome indicator, such as quality or effectiveness of primary education. ### Tertiary (university) education outcomes - Slovenia registered an efficiency score of 0.58 and ranked 13th out of 44 countries in the sample based on the effectiveness of increasing the proportion of graduates as a share of the school-age population. - The proportion of university graduates of the school-age population is about 10 percent higher in Slovenia compared to the NM-8 countries in the sample. - Tertiary education spending per pupil as a share of GDP per capita is just 4 percent higher. ### Multiple-outcome education efficiency model - Model assessed efficiency of average public spending (as a share of GDP) in yielding outcomes in: - primary pupil-teacher ratio, - secondary school enrollment rates, - proportion of university graduates relative to the school-age population. - Slovenia ranks 22nd out of 23 countries with an efficiency score of 0.69. - Table 5 entries (selected for Slovenia and context): - Slovenia — Primary student-teacher ratio: 13.06; Secondary enrollment (percent): 63.1; Tertiary total graduates (percent): 8.5; Public education spending (percent of GDP): 6.68; Efficiency Score: 0.69; Rank: 22 ### Enhancing education sector efficiency — findings and recommended initiatives - Formalize monitoring of key outcome indicators and gradually link them to the budget process. - Use a pilot ministry for implementing performance-based budgeting; link spending at the individual school level increasingly to outcome indicators. - Build on existing monitoring of graduation and drop-out rates by level of education, pupil-teacher ratio, academic results and scores on international standardized tests. - Primary education-specific measures: - Trim the number of primary teachers through natural attrition and implement a selective hiring freeze for new teachers. - Merge small primary schools over the coming years. - Shift funding mechanism for primary and secondary schools increasingly to a per-capita based formula linked to expected cost of service delivery. - As primary and secondary school-age populations are expected to decline over the medium term, encourage pooling resources by jointly hiring and sharing new teachers. - Cost-recovery and targeting: - Pursue greater cost recovery of preprimary child care costs and university tuition. - Target scholarships to lower-income students to insulate them from higher tuitions. - Institutional note: With about 900 schools, educational facilities represent about half of all public sector institutions. - Secondary schools are more advanced in per-capita funding direction, as they are more firmly under central government control. ### Social protection transfers — effectiveness and targeting - Overall finding: Social protection transfers are relatively large in Slovenia but have not resulted in a significantly lower risk of poverty before transfers. - In a sample of 26 countries, Slovenia ranked 19th in terms of the efficiency of social protection outlays in reducing the proportion of the population at risk of slipping into poverty. - Possible reason: A relatively more equalitarian earnings structure in Slovenia before transfers reduces marginal effectiveness of transfers (decreasing returns to scale). - Fiscal burden: Social protection transfers were over 18 percent of GDP during 2002-03 compared to the sample average of 16.7 percent of GDP. - Comparative example: Denmark reached the efficiency frontier despite social protection spending over 20 percent of GDP as it successfully lowered poverty risk by almost 20 percentage points. - Recommendation: Substantial scope exists to better target social spending in Slovenia to improve outcomes. ### Effectiveness of targeting social benefits — empirical evidence - 2002 household budget survey (random sample of over 1,100 individuals) shows market income and social protection transfers distribution. - Finding: Earnings distribution by quintile is largely unaffected by social protection transfers other than pensions. - Example statistic: The top income quintile (fifth quintile) receives 16 percent of total nonpension social benefits. - Policy implication: Efficiency of nonpension social benefits in reducing earnings inequality could be strengthened by trimming benefits to upper-income households and redirecting savings to low-income households. - Table 6 (summary in tolars): - First quintile — Avg Income in Quintile: 1,135,256; Share of Total Earnings in Sample (in percent): 7; Avg Income After Social Transfers: 1,376,294; Share of Total in Sample (in percent): 23 - Second quintile — Avg Income in Quintile: 2,315,159; Share of Total Earnings in Sample (in percent): 13; Avg Income After Social Transfers: 2,584,891; Share of Total in Sample (in percent): 26 - Third quintile — Avg Income in Quintile: 3,200,545; Share of Total Earnings in Sample (in percent): 18; Avg Income After Social Transfers: 3,410,876; Share of Total in Sample (in percent): 20 - Fourth quintile — Avg Income in Quintile: 4,240,799; Share of Total Earnings in Sample (in percent): 24; Avg Income After Social Transfers: 4,384,495; Share of Total in Sample (in percent): 14 - Fifth quintile — Avg Income in Quintile: 6,546,620; Share of Total Earnings in Sample (in percent): 37; Avg Income After Social Transfers: 6,714,641; Share of Total in Sample (in percent): 16 - Overall — Avg Income in Quintile: 3,484,990; Share of Total Earnings in Sample (in percent): 100; Avg Income After Social Transfers: 3,691,588; Share of Total in Sample (in percent): 100 - Conclusion: Improved targeting of nonpension social benefits could reduce overall spending while improving outcome indicators. ### Conclusion — fiscal flexibility, efficiency and targeting - Core assessment: Public spending in Slovenia is relatively inflexible, inefficient and poorly targeted. - Implication: There is scope to trim expenditure without sacrificing outcomes in health, education and social protection, but budget rigidities must be addressed first. - Risks of inaction: Rigidities will exert upward pressure on spending over the medium term, shifting consolidation burdens to flexible areas or prompting poorly targeted across-the-board cuts leading to underinvestment in infrastructure and deterioration of public services. - Recommended structural actions: - Accelerate implementation of flexible work arrangements and rationalize excess capacity to enhance budget flexibility. - Review funding mechanisms of quasi-autonomous institutions (hospitals, health clinics, primary schools, universities) to encourage rationalization of excess capacity and enhance spending flexibility. - Consolidate indirect spending units in the budget process and implement performance-based budgeting to unlock savings and enhance managerial flexibility and efficiency. - Reform health care and education financing to encourage rationalization of inefficient service providers with high overhead costs. - Strengthen targeting of social protection spending: expand cost recovery of preprimary child care, allow higher university tuitions with means-tested scholarships, and review wide coverage and long duration of social benefits relative to NM-8 and most EU-15 countries to re-direct resources to those most in need. *Source: IMF staff report excerpt (pages provided).* ### 49. Over the next decades, Slovenia is projected to age at one of the fastest rates in ### Over the next decades, Slovenia is projected to age at one of the fastest rates in Europe ### Background — Demographic and labor market developments - Population and dependency projections: - Elderly dependency ratio (population aged over 65 / working population aged 20–64) projected to increase from around 23 percent in 2004 to over 60 percent in 2050. - Share of elderly above 80 years: nearly 19 percent of the population aged over 65 years in 2004, expected to comprise about 34 percent by 2050. - Population projected to decline starting around 2015. - Drivers: - Very low fertility rate in Slovenia—among the lowest in Europe. - Relatively high life expectancy, especially of women. - Labor market trends: - Labor force participation ratios have been declining, with a slight reversal in 2005. - High inactivity rate among the elderly (above 50 years), particularly among women. - Low employment rate for the elderly; part-time and fixed-term employment arrangements are relatively uncommon. - These trends will exacerbate fiscal burden as larger shares reach retirement age. ### Background — Fiscal trends - Fiscal structure and pressures: - Pension Fund in deficit since 1996; financed through general revenues of the state budget. - In 2003, the state budget transferred the equivalent of 2.5 percent of GDP to finance Pension Fund deficits. - Old-age pension net replacement rate in 2005 stood at 70 percent. - Pensions and a number of noncontributory benefits are indexed to wages. - Share of pension and health care spending larger than in EU-25 countries. - Channels affecting fiscal deficits as population ages: - Increased demand on pensions and long-term health care as elderly increase. - Shrinking tax and contribution base as number of young workers decreases. - High contribution rates limit scope for further contribution increases. - Decline in labor force lowers potential growth and tax revenues unless productivity improves. - Higher government borrowing increases interest costs, pressuring deficits and debt sustainability. ### Model simulations — Methodology and assumptions - Method: Generational accounting model using age and gender profiles to distribute taxes and transfers across cohorts; pensions modeled via aging, eligibility, benefits, and employment effects. - Key quantitative assumptions (preserve verbatim): - Labor productivity growth assumed to decline to 3 percent by 2008 and, in the baseline case, stay at 3 percent over the long run. - Labor force participation assumed to stabilize at 73.6 percent in the long run. - Unemployment rate assumed to be lowered to 5.4 percent. - Long-run employment growth with declining working-age population translates into negative employment growth of -0.7 percent over the long run. - GDP growth gradually declines and stabilizes around 2.5 percent. - Discount rate assumed to be 4 percent (based on average nominal interest rate on public debt of around 7 percent and a long-run inflation rate of 3 percent). - Demographic projections from the Statistical Office of Slovenia; projections for 2051-2150 assume same population structure as in 2050. - Age and gender profiles for taxes and expenditures obtained from Ministry of Finance; profiles assumed stable. ### Simulation results — Baseline scenario and projections - Pension and health expenditure: - Pension expenditures projected to rise from 11 percent of GDP in 2005 to almost 16 percent of GDP in 2050 in the baseline scenario. - Alternative pension scenarios: rise by 1½ percent in optimistic case; rise by over 6 percent in pessimistic case. - Health expenditures assumed to grow at the same rate as wage growth; increase in population aged above 80 years will drive long-term care costs upward. - Revenues: - Income taxes and social security contributions assumed to grow per capita at same rate as labor productivity and thus decline as share of GDP as GDP growth declines due to shrinking labor force. - Consumption taxes (value-added and trade taxes) expected to increase as share of GDP given high elderly consumption. - Fiscal outcomes: - Primary deficit and net debt projected to reach around 10 and 300 percent of GDP, respectively, by 2050 in the baseline. - Net debt projected to reach 60 percent of GDP by 2030 and accelerate thereafter. - Intertemporal fiscal sustainability gap (NPV of required permanent fiscal adjustment over next 150 years) corresponds to around 10 percent of GDP. - Permanent fiscal adjustment needed to reach a target debt-to-GDP ratio of 60 percent by 2050 is nearly 5 percent of GDP. - A smoother adjustment path, with incremental structural changes targeting near fiscal balance, can also achieve the 60 percent target by 2050. ### Sensitivity and timing of adjustment - Sensitivity: - Results sensitive to productivity and interest rate assumptions; productivity growth has asymmetric effects (raises per-capita age-related expenditures but also raises per-capita revenues and GDP). - Under alternative productivity and interest rate assumptions, the fiscal gap remains sizable. - Cost of delay: - Demographic shift already exerting fiscal pressure; pension reforms started in 2000 mitigate but are fully phased in by 2023. - If tax or expenditure adjustment is delayed by one year, additional adjustment needed to close the fiscal gap would rise by 1/8 percent of GDP. - A 10 to 15 year window exists to implement additional reforms to ensure long-term debt sustainability; delaying increases adjustment burden. ### Policy implications and recommendations - Further reforms needed beyond measures introduced since 2000, because phased-in measures and some rollbacks are insufficient to restore fiscal viability of the pension system. - Recommended elements: - Early, integrated reform agenda to reduce burden of adjustment and restore fiscal sustainability. - Expenditure reform aiming to target fiscal balance or a small surplus over the medium term to accommodate rising age-related spending pressures. - Measures to increase labor utilization among the elderly (raise participation, promote flexible work arrangements) to improve the employment effect and reduce pension expenditure as percent of GDP. - Consider structural tax or expenditure adjustments equivalent to nearly 5 percent of GDP (permanent) to reach target debt-to-GDP ratio of 60 percent by 2050, or larger adjustments (about 10 percent of GDP in NPV terms) to satisfy intertemporal solvency under current policies. *Source: IMF staff chapter prepared by Anita Tuladhar (excerpt from the provided PDF content).* ### 63. Given these projections, a comprehensive reform agenda will be needed to ### _cr06250 - 63. Given these projections, a comprehensive reform agenda will be needed to ### Fiscal sustainability challenge and intertemporal fiscal gap - Baseline scenario: 10.2 (Productivity growth (3%) and interest rate (4%)) - Scenario variants (Intertemporal Fiscal Gap, in percent of GDP): - Higher productivity growth (3.5%): 12.5 - Lower productivity growth (2.5%): 10.5 - Lower interest rate (3.5%): 17.1 - Higher interest rate (4.5%): 7.9 - Long-run pension reform measures considered: - Increase retirement age to 65. - Lower net replacement rate from 70 percent to 52 percent. - Index pensions to prices. - Effect of reforms: - Each scenario reduces the intertemporal fiscal gap but the gap “would still remain significant,” indicating need for systemic reform rather than marginal parametric changes. - Non-pension drivers: - Increases in health care costs and non-age-related spending relative to GDP are key drivers of the fiscal gap. - Simulations where growth of per capita health and non-age-related spending lags productivity growth by 0.5 percentage point narrow the fiscal gap considerably, highlighting importance of containing nonpension costs. - Closure of fiscal gap requires an integrated reform package combining lower net replacement rate, extended retirement age, and adjustments to lower growth of non-age-related spending. ### Intergenerational burden and generational fairness - Baseline and integrated reform comparisons (In percent of GDP): - Baseline Intertemporal fiscal gap: 10.2 - Combined reform scenario (Integrated Reform): -0.3 - Intergenerational balance gap: Baseline 0.7; Integrated Reform 1.6 - Interpretation: - Under the baseline, the intergenerational fiscal gap is smaller than the intertemporal fiscal gap, implying future generations initially pay lower net taxes than the current generation (unsustainable for current policies). - Reforms that restore sustainability will often impose a heavier burden on future generations. Example: under the integrated pension and nonage spending reform, the intergenerational gap becomes larger than the intertemporal fiscal gap. - Early implementation of fiscal reform is needed to minimize the burden on future generations. ### Scenario-specific simulated impacts (Intertemporal Fiscal Gap / Generational Fairness components) - Contribution to Intertemporal Fiscal Gap reductions (In percent of GDP): - Combined reform scenario: -0.3 - Tighter non-age related spending: 3.1 - Extended retirement age: 5.7 - Lower net replacement rate: 6.2 - Lower pensions indexation: 4.1 - Tighter health care spending: 6.4 ### Projection behavior for primary balances and net debt (summary of figures) - Primary Balances (charts summarize trajectories for 2003, 2013, 2023, 2033, 2043): - Plotted series include: Baseline; With Combined Reform; With Lower Net Replacement Rate; With Lower Indexation; With Lower Non-Age Spending; With Extended Retirement Age; With Lower Health Care Costs; Alternate scenario With fiscal gap closure. - Vertical axis in charts runs from -15 to 5 (In percent of GDP). - Net Debt (charts summarize trajectories for 2003, 2013, 2023, 2033, 2043): - Plotted series include: Baseline; With Combined Reform; With Lower Net Replacement Rate; With Lower Indexation; With Lower Non-Age Spending; With Extended Retirement Age; With Lower Health Care Costs; Alternate scenario With fiscal gap closure. - Vertical axis in charts runs from -100 to 500 (In percent of GDP). ### Conclusions and policy recommendations (chapter summary) - Main conclusions: - A large demographic shift, early retirement, and a rigid fiscal structure will pose significant challenges for fiscal policy in the coming decades, leading to significant deterioration of public finances and adverse impacts on debt sustainability and macroeconomic stability. - Policy recommendations: - Early and comprehensive action is needed to deal with age-related spending pressures. Recommended measures: - Reform the pension system on a systemic basis through an increase in the effective retirement age and a reduction in the generosity of benefits. - Contain the costs of publicly provided health care and non-age-related spending. - To withstand aging pressures and contain debt within the Maastricht criterion, fiscal adjustment plans need to be more ambitious in trying to reach fiscal balance or a small surplus over the medium term. - Considering long lags with which reforms have fiscal impact, early action is warranted. Delays will be costly in terms of additional adjustment needed in the future and will pose a higher adjustment burden on future generations. ### Appendix highlights: pension system and generational accounting methodology - Pension system (Slovenia): - System comprises a mandatory, defined-benefit, pay-as-you-go public pension insurance scheme and a voluntary supplemental pension system. - In 2005, expenditure on pensions stood at 10.7 percent of GDP. - Total assets of collective voluntary occupational schemes were 1.4 percent of GDP in 2004. - 1999 reform phased in by 2024 included: lowering the accrual rate from 85 percent to 72.5 percent for full pension service years; lengthening the wage assessment period from 10 to 18 best consecutive years; increasing full pensionable retirement age to 63 for men and 61 for women with minimum 20 years of service. - After reforms fully phased in, the net replacement rate was envisaged to stand at 56 percent of wages. - Despite reforms, average net replacement rate was close to 70 percent in 2005. - Generational accounting model (methodology overview): - Transfers and per capita transfers projected using age profiles and growth linkages to per capita productivity growth (indexation). - Generational account defined as the present value of average remaining lifetime net tax payments, discounted by real discount factor r and adjusted for survival probabilities. - Intertemporal fiscal gap: immediate and permanent adjustment in taxes or expenditures needed to satisfy intertemporal budget constraint (formal expressions provided). - Intergenerational balance gap: hypothetical intertemporal gap if future generations paid same net taxes as current newborns adjusted for growth; IBG > GBG when current policy is favorable to future generations. *Source: Staff calculations.* ### Appendix IV ### Appendix IV ### Pension expenditure framework and decomposition - Pension Expenditure / GDP expressed as: - Pension Expenditure = Average pension benefits / Average productivity * Number of pensioners / Number of employed - Rewritten components: - Benefit Effect (BE) = Average benefits / Average productivity - Eligibility Effect (ELIGE) = Number of pension recipients / (Population > 55) - Aging Effect (AE) = (Population > 55)/(15< population <64) - Employment Effect (EMPE) = Number of employed/(15< population <64) = Employment rate * Labor participation rate - Log-linear differencing used to derive contributions of each factor: - d (Pension Expenditure /GDP) = [d ln(BE) * d ln(ELIGE) * d ln(AE) * d ln(EMPE)] * Pension Exp / GDP (t=0) + err - Differences taken over one-year intervals and summed over the entire period to minimize residual (Eskesen, 2002). ### Baseline scenario assumptions and central projection - Key baseline assumptions (from the Convergence Program of Slovenia): - Unemployment rate falls from 6.4 percent to 5.4 percent by 2020 and stabilizes thereafter. - Labor participation rate increases from 68 to 73.6 percent by 2050. - Average effective retirement age increases to 62 by 2023 (in line with approved pension reforms). - Average benefits decline due to reform measures introduced in 2000. - Net replacement rate declines from 70 percent to 62 percent by 2030 (World Bank, 2004 estimate). - Average productivity growth declines gradually from 3.5 percent to 1.7 percent by 2050. - Baseline projection: - Pension expenditure is expected to rise rapidly after 2024 to almost 16 percent of GDP by 2050. ### Sensitivity and alternative scenarios (optimistic / pessimistic) - Optimistic scenario assumptions: - Labor participation rate higher by 1 percentage point. - Net replacement rate declines further to 49 percent of wages in the long run. - Labor productivity growth stays constant at 3.5 percent. - Optimistic outcome: - Pension benefits as a share of GDP rise to 12.3 percent. - Note: Higher productivity does not reduce pension expenditure as a share of GDP because pension benefits are indexed to wages which grow with productivity. - Pessimistic scenario assumptions: - Average retirement age increases only to 59 years. - Labor participation rate rises to 71 percent by 2050. - Pessimistic outcome: - Pension expenditure expected to rise to 17.3 percent of GDP. - Common finding across scenarios: - In each of the three cases (baseline, optimistic, pessimistic), the demographic (aging) effect contributes the most to the rise in pension expenditure. - Negative contributions from eligibility effect, benefit effect, and employment effect do not offset demographic aging—even under the optimistic scenario. ### Pension reform alternative scenarios (impact on debt sustainability) - Four reform scenarios analyzed (outcomes summarized as percent of GDP): 1. Higher retirement age: - Gradual increase in average effective retirement age from 61 years to 63 years (2 years beyond baseline). - Demographic pressure on pension expenditure is delayed, with a reduction of over 2 percent of GDP by 2050 relative to the baseline. 2. Lower replacement rate: - Increase in the number of years used for calculating the pension base leading to entry net replacement rate lowered to 52 percent (corresponds to reforms implemented in 2000 but before wage indexation introduced in 2005). - Pension expenditure rate of increase lowered, but still remains high at over 13.5 percent of GDP. 3. Price indexation of existing pensions: - Indexing existing pensions to prices substantially lowers pension expenditure to 8.0 percent of GDP through 2025; subsequently demographic pressure increases spending to 11 percent of GDP. 4. Combined scenario (higher retirement age + lower entry net replacement rate): - Pension expenditure contained at around 11 percent of GDP over the next 50 years. ### Retirement incentives, behavior, and institutional context - Labor force participation among the elderly in Slovenia: - Labor participation rates lower by nearly 10 percentage points for population aged 50–59 compared with EU-15. - Early exits result in an average effective retirement age that is the lowest among the EU-25 (World Bank, 2005). - In 2005, 12 percent of the population aged 55–59 years was on disability pensions. - Nearly 4 percent of new old-age pensioners retired early with a penalty. - Reforms implemented in 2000: - Full pensionable age increases phased in: for men, 2005 full pensionable age 60 years and 6 months expected to rise to 63 years by 2009 for 20 minimum years of work; for women, 2005 full pensionable age 55 years and 4 months expected to reach 61 years by 2024. - Early retirement allowed with penalty if minimum-qualifying period of 40 years (38 for women) met. - Bonus accruals for working beyond full pensionable age. - Findings on incentives: - Simulation of retirement benefits shows the approved system may still provide incentives for early withdrawal. - For men, it could be beneficial to retire as early as age 61, two full years ahead of the already-low full pensionable age. - Incentives persist under alternative assumptions on valorization and indexation and are particularly strong for low- and high-income earners. - Policy implication: - Further review of penalties, bonuses, and other pension parameters is called for to ensure the effective retirement age increases. ### Methodology for incentive estimation - Primary measure: Social Security Wealth (SSW) accrual method - Pension wealth = present discounted value of expected future pension benefits, conditional on survival probabilities. - Pension accrual = difference in pension wealth due to an additional year of work. - Effective implicit tax on deferring retirement from t to t+1: - Effective implicit tax = [Pension wealth(t) – Pension wealth(t+1)] / Wage(t) - Pension accrual(t) = [Pension wealth(t+1) – Pension wealth(t)] / Wage(t) - Interpretation: - Negative pension accrual and positive effective tax rate indicate strong incentive to exit the labor force. - Positive effective implicit tax means the wealth effect dominates the accrual effect. - Supplementary forward-looking measures: - Peak value measure (difference between pension wealth from retiring now and maximum pension wealth achievable by retiring later). - Option value / peak value concepts used to capture multiyear accrual nonmonotonicity. - Pension benefit computation inputs: - Valorization of wages (linked to pension indexation; assessment period increasing from 10 to 18 best consecutive years under 1999 reforms). - Pension base = average of the 18 best consecutive years’ annual wage assessments: - Pension base = [∑ (annual wage(t) * ∏ valorization rate(s))] / 18, where t = A-18 … A and A is age of retirement. - Service factor (accrual rates, years of service, penalty and bonus rates): - Accrual rate: 35 percent for first 15 years; 1.5 percent for every additional year. - Service factor formula: - Before FPA: (35 + 1.5*(Service years -15))*(100 - Penalty rate)/100 - At FPA: (35 + 1.5*(Service years -15)) - After FPA: (35 + 1.5*(Service years -15))*(100 + Bonus rate)/100 - Pension benefit = Pension base * Service factor / 100 - Additional model sensitivities noted: - Pension wealth sensitive to assumptions on remaining life expectancy, pension indexation, and discount rate. - For married workers survivor benefits and joint survival probabilities included. - Pensions are taxable; personal income tax becomes binding for workers earning above the average wage levels, starting at around 150 percent of the average wage (effective tax schedule provided in Appendix II). *Source: _cr06250 - Appendix IV* ### 77. For the baseline scenario, we consider a hypothetical male individual who joins ### _cr06250 - 77. For the baseline scenario, we consider a hypothetical male individual who joins ### Baseline assumptions for the simulated worker and pension base - Worker: hypothetical male who joins the labor force at age 24 and is eligible for full pensions at age 63. - Working period: 40 years. - Wage growth assumptions: - Wages grow annually at the same rate as economy-wide average wages—5 percent. - Real wages grow annually at 2.5 percent. - Inflation at 2.5 percent. - Seniority increment rate of 1 percent. - Valorization of past earnings: - Set equal to the average economy-wide wage growth in the baseline (per rules effective since 2005). - Sensitivity test uses an alternative implicit valorization tax rate of 0.77 percent of wage growth (in line with 2005 data). - Assessment period for pension base: 18 best consecutive years of earnings since 1970 (monotonic wage increase implies last 18 years before retirement). - Synthetic net wage: pension base uses a synthetic net wage equal to about 63 percent of the gross wage. - Survival and life expectancy: single worker surviving till age 77 (estimated remaining life expectancy for men in Slovenia conditional on surviving till age 58). - Discount rate and indexation: - Baseline discount rate: 3 percent. - Pension benefits indexed to nominal wage increases every year in baseline. - Alternative scenarios vary these assumptions to reflect pension indexation lagging wage growth. - Pensions are taxable; effective tax schedule used for net pensions in calculations (provided in Appendix II of source). ### Simulation results — main findings on incentives and optimal retirement age - General result: strong incentives for men to retire early under baseline parameters. - Implicit tax findings (examples for a man with expected life expectancy of 77 years and average wage): - An additional year of work creates an implicit tax of 2 percent at age 61 and 13 percent at age 62. - Maximum pension wealth accrued at age 61 when benefits accrued between age 58 and any year up to age 66 — suggesting age 61 as optimal retirement age in baseline. - Kink in implicit tax curve at full pensionable age of 63 due to nonlinearity of penalty and bonus rates: - Service factor reduced by 2.35 percent for retiring one year before full pensionable age (62). - Service factor raised by 4.2 percent for retiring one year after full pensionable age (64). - Life expectancy sensitivity: - If life expectancy increases to 81 (horizon 2050), implicit tax remains negative until age 64; peak pension wealth turns negative only at age 65 — suggesting age 65 as optimal in that scenario. - Increasing life expectancy by 4 years can remove motivation for early retirement; there can be an incentive to defer retirement by a year. - Discount rate sensitivity: - Higher discount rate of 5 percent can advance optimal retirement age by almost a year to age 60. - Lower discount rate of 1 percent can make implicit tax positive at age 62. - Conclusion: incentive for early retirement exists irrespective of discount rate assumed, though magnitude and optimal age vary. - Seniority increment sensitivity: - Without seniority wage growth, optimal retirement age moves forward to 60 years (smaller accrual effect). - Worker fulfilling minimum years of service example: - Male worker at age 59 with 40 years of service: optimal to retire at age 60 (a year more than eligibility), reflecting positive implicit tax and negative peak value. - Female worker example: - Woman eligible to retire at age 58 with 35 years of service plus 3 purchased years; expected remaining life expectancy of 83 in baseline. - Simulations show implicit tax of deferring retirement remains negative up to age 63 (two years beyond full pensionable age) because higher female life expectancy strengthens accrual effect versus loss of an extra year of benefit. - Wage-level effects: - Incentives to retire early particularly strong for low- and high-wage earners. - Low-wage earners: minimum pension base (close to 60 percent of average net wage in 2005) can be binding so an extra year of work does not raise pension base — wealth effect dominates → stronger incentive to retire. - High-wage earners: larger pensions push income into higher tax brackets; effective tax rate increases and negates accrual effect → stronger incentive to retire early. ### Quantitative illustrations and tabulated implicit tax excerpts (selected values preserved) - Baseline implicit tax (men) by retirement age (selected entries from text table): - Age 58: -34.62 - Age 59: -21.74 - Age 60: -9.33 - Age 61: 2.53 - Age 62: 13.72 - Age 63: -5.64 - Age 64: 12.38 - Age 65: 28.73 - Sensitivity examples (implicit tax by retirement age under alternative assumptions, selected rows): - Higher discount rate: - Age 58: -19.99 - Age 59: -9.48 - Age 60: 0.77 - Age 61: 10.65 - Age 62: 20.09 - Age 63: 3.26 - Age 64: 18.85 - Age 65: 33.14 - Lower discount rate: - Age 58: -53.97 - Age 59: -37.74 - Age 60: -22.32 - Age 61: -7.79 - Age 62: 5.74 - Age 63: -16.65 - Age 64: 4.50 - Age 65: 23.44 - No seniority increment: - Age 58: -25.56 - Age 59: -11.73 - Age 60: 1.47 - Age 61: 13.95 - Age 62: 25.61 - Age 63: 4.40 - Age 64: 23.49 - Age 65: 40.61 ### Alternative scenarios and policy parameter sensitivities - Pension indexation: - Incentives to retire early are strongest under wage indexation and weakest under price indexation. - Under price indexation (or reduced wage indexation where pension growth effectively lags wage growth), accrual effect dominates and optimal retirement age can shift to age 62. - Valorization (valorization coefficient) sensitivity: - Changing the valorization coefficient (including the observed .77 in 2005) changes magnitude of implicit tax but not sign; optimal retirement age remains at 61 (the age at which implicit tax turns positive and peak value turns negative). - Assessment period for pension base: - Raising assessment period from 18 years to 25 years does not change optimal retirement date, though it affects benefit levels considerably. The effect on pension base of working an additional year is very small. - Accrual rate structure: - Current system: accrual rate highly front-loaded — 35 percent for the first 15 years and 1.5 percent for every additional year. - Alternative (back-loaded) example: 30 percent for first 15 years and 1.7 percent for each additional year (maintains same service factor of 72.5 percent for man with 40 years at age 63) — optimal retirement age rises to 62 years. Conclusion: back-loading accrual rates can increase effective retirement age. - Other alternative accrual schedules shown in text table (selected implicit tax entries preserved in source) demonstrate material effects on incentives. - Increasing statutory full pensionable age: - Raising full pensionable age from 63 to 64 (with corresponding increase in minimum pension-qualifying period): optimal retirement age remains at 62 (still two years ahead of new full pensionable age). - Further increases in statutory age do not necessarily change optimal retirement age — raising statutory age strengthens wealth effect for given life expectancy and may not raise effective retirement age without other policy changes. ### Conclusions and policy implications (policy-relevant takeaways) - Labor force participation among elderly in Slovenia is considerably lower than in EU-15, reflecting low full pensionable age. - 1999 pension reforms (phased in since 2000) aimed to increase pensionable age and provide bonuses/penalties to defer retirement, but effective retirement age may not rise significantly due to provisions allowing retirement earlier than full pensionable age and implicit incentives to retire early. - Simulations based on accrual methodology indicate current pension parameters encourage early exit from employment, particularly for men. - Redistributive features (minimum pension base and progressive effective tax rate) strengthen early-retirement incentives for low- and high-wage earners. - Robustness: early-retirement incentives persist across different discount rates and seniority wage-growth assumptions. - Policy implications and reform options highlighted: - Reform bonus and penalty rates that directly affect incentives. - Back-load accrual rates over career to encourage later retirement (example: moving from front-loaded to more back-loaded accrual raises optimal retirement age). - Consider price indexation or reduced wage indexation to weaken incentives to retire early (price indexation weakens wealth effect relative to accrual effect). - Increasing assessment period for pension-base calculation can lower pension expenditure significantly without weakening retirement incentives. - Careful coordination required if raising statutory retirement age, since early-retirement incentives in other parameters could offset intended effects on effective retirement age. *Source: Staff calculations and analysis in the provided IMF chapter section.* ### Appendix I ### Appendix I ### Penalty and Bonus Rates Under Slovenia's Pension System - MenAgeWomenAge - 12 percent589 percent58 - 8.4 percent595.4 percent59 - 5.4 percent602.4 percent60 - 3.0 percent61 - 1.2 percent62 - MenAge - 3.6 percent64 - 6.0 percent65 - 7.2 percent66 - 3.0 percent 1st year - 2.6 percent 2nd year - 2.2 percent 3rd year - 1.8 percent 4th year - Bonus for extended years of service - Bonus for extended years of service after qualification for full pensions (40 years) - Penalties for insufficient years of service ### Key points (as presented) - Penalty and Bonus Rates Under Slovenia's Pension System (table format retained in source). - Bonuses apply for extended years of service, including after qualification for full pensions (40 years). - Penalties apply for insufficient years of service. - Numerical rates and age labels are given in the table lines above exactly as shown. ### Sources and attribution *Sources: Slovene authorities; and World Bank (2004).* ### 0.25 AW ### 0.25 AW ### D. Reforms to Increase Labor Participation - Work incentives can be improved through reforms affecting both the tax and benefit systems; the earned income tax credit (EITC) is one example that provides payments to low-income individuals who take low-wage jobs and reduces their METRs, strengthening work incentives. - Evidence from Slovenia: - Legislative changes in 1998 that curtailed the duration of the unemployment benefit (UB) led to increased exits from registered unemployment and shorter unemployment durations for those affected (Van Ours and Vodopivec, 2006). - Median Duration (Months) — Simulation Results (Median worker is a 30-year-old male, vocational education, 10-15 years experience, no dependents; UB duration lowered from 12 to 6 months): - Before 1998 reform / After 1998 reform / Difference - Median worker: 5.3 / 4.1 / -1.1 - If age = 40: 8.5 / 5.4 / -3.1 - If female: 8.9 / 5.4 / -3.5 - Shortening UB duration produced rapid declines in unemployment duration for those affected, interpreted as increased job search rather than improved labor demand. - Proposed benefit-side change to reduce METRs for low-income individuals: - Leave the GMI unchanged (currently amounting to 71 percent of the minimum UB) because it is linked to the poverty line. - Reduce the unemployment assistance (UA) to half the minimum UB from the current ratio of 80 percent. - With UA smaller than GMI, UA becomes a temporary support that cannot be relied upon for a decent living, incentivizing more intensive job search. - An individual who exhausts UB would qualify for UA and would not be able to opt for the higher GMI during the statutory duration of the UA, which could also be shortened. - Assume unchanged child benefit. - Proposed alternative tax schedule (three-rate system) considered as an alternative to a flat tax: - Assumptions: - All labor incomes, whether subject to personal income tax or not, would be subject to social security contributions at the current rate of 22.1 percent. - The general tax exemption and the child tax exemption would remain unchanged. - Taxable income brackets and rates: - 0–minimum wage (42 percent of the average wage): 15 percent - Minimum wage – 2 average wages: 20 percent - Above 2 average wages: 25 percent - Rationale: - A 15 percent rate up to the minimum wage targets individuals with taxable income up to the minimum wage, a slight reduction from the current 16 percent many face. - The bulk of the working population would face 20 percent (a commonly cited flat tax rate). - High earners (taxable income at least twice the average wage) would be taxed at 25 percent. - Expected impacts of the combined tax-benefit reform (three-rate system + reduced UA): - Strengthened job-search incentives for low-income individuals due to smaller UA and the signal that long-term reliance on social support is insufficient. - Decline in number of UA recipients (UA has been increasing despite declining overall unemployment). - Reduction in METRs for most people relative to the current system and for most low-income individuals relative to the flat tax proposal; in particular, the spike between UA and UB would be eliminated. - METRs could be smoothed further by adjusting other benefits (such as child benefit) and/or various tax exemptions, especially at points where tax rates increase. ### Comparison of Systems and Key Findings - Systems compared: current system; hypothetical 20-percent flat tax with unchanged benefits; proposed three-rate system (15-20-25 percent) with benefit changes. - Key results and observations: - Figure 1 (described): Marginal effective tax rates (METRs) for a single individual without children and for married couples with two children at various income levels under the current system, flat tax, and three-rate system: - The three-rate system delivers lower METRs than the current system and the flat tax in the income range up to the average wage. - Beyond the average wage, the flat tax produces lower METRs as no other tax allowances or benefits are changed under the flat tax. - Figure 2 (described): METRs when taking a job under the three systems for representative low-income cases (single without children; married where principal earner earns 0.67 AW): - Whether moving from complete inactivity, from UA, or from minimum UB, these low-income individuals/families generally face METRs that are lower under the three-rate system than currently or under the flat tax. - METRs would, however, remain somewhat high in some cases (up to 40 percent). - Careful calibration of other benefits and tax allowances could create lower METRs. - Figure 3 (described): Average effective tax rates (percentage of overall income from labor and welfare paid to government) for various families: - The flat tax (with unchanged benefits) would raise the tax burden of low-income workers and could generate higher average effective tax rates than both the current and three-rate systems up to a point. - The three-rate system generally produces consistently lower average effective tax rates than the other systems, with two exceptions: - Individuals receiving UA would face higher effective tax rates (consistent with intentionally incentivizing job search). - At high incomes, the three-rate system’s 25 percent bracket leads to higher average effective tax rates than the flat tax; these intersections occur mostly beyond incomes equal to twice the average wage, so higher (around 35 percent) effective tax rates would apply only to well-off individuals. ### E. Conclusion and Policy Recommendations - Diagnosis: - The Slovene tax and benefit systems create disincentives to work, contributing to weaker labor participation in Slovenia relative to the EU-15 average for several groups, particularly those with poor-income prospects. - Under the current system, marginal effective tax rates are high at the lower end of the income distribution, discouraging labor participation and intensive job search by the jobless. - Policy implications: - Reforms to improve work incentives should focus on both the tax and benefit systems. - A hypothetical 20 percent flat tax with unchanged benefits would worsen work incentives for individuals with poor-income prospects and undermine efforts to raise labor participation and potential growth. - An alternative combining three fairly low personal income tax rates (15-20-25 percent) with widening the gap between minimum UB and UA would: - Lower marginal effective tax rates for most individuals. - Increase work incentives. - Reduce average effective tax rates for most people. - Further work is needed to: - Account for aspects of the welfare system not directly tied to job status. - Incorporate labor demand considerations and broader equilibrium effects. - Assess the budgetary impact of the reform before implementation. *Prepared by IMF staff; analysis reflects a partial equilibrium perspective.* ### VI. Trends in Technological and Quality Upgrading and Implications for Export Competitiveness in Slovenia — Introduction - Context and challenges: - Slovenia faces increasing challenges in maintaining export competitiveness due to: - High income level relative to other new EU member states and emerging markets (cost disadvantage). - Loss of the exchange rate instrument. - For a high-wage economy like Slovenia, quality upgrading and specializing in higher-value-added niche markets will be important to withstand competition from low-cost economies and sustain export market shares. - Objectives of the chapter: - Assess Slovenia’s competitive position by examining trade patterns and whether exports show evidence of technological and quality upgrading. - Two central questions: - Is there evidence of technological and quality upgrading of Slovene exports? - To what extent does technological and quality upgrading help explain Slovenia’s export market performance? - Main finding preview: - Slovenia has increased the share of high-technology goods in its exports, including to EU-15 markets, but this increase is smaller than in most other emerging markets. - The smaller increase is partly due to Slovenia’s favorable initial position and a slower pace of quality upgrading, which appears related to a catching-up process and limited opportunities for market linkages and technological spillovers. - Chapter organization (sections outlined): - Section B: background on overall competitive indicators. - Section C: literature on technological and quality upgrading and export competitiveness. - Section D: specialization trends and indicators of competitiveness of high-technology goods. - Section E: evidence on quality content of exports. - Section F: factors explaining market competitiveness trends and determinants of quality upgrading. *Prepared by Anita Tuladhar and Mercy Mathibe; cross-country results drawn from ongoing research by S. Fabrizio, D. Igan, and A. Tuladhar.* ### 117. Most indicators suggest that the competitiveness of the Slovene economy is ### _cr06250 - 117. Most indicators suggest that the competitiveness of the Slovene economy is ### Competitiveness overview (paragraph 117) - CPI-based and cost-based real effective exchange rates have been broadly stable over the past five years. - Studies on equilibrium exchange rates (Bulir and Smidkova, 2004; and Egert and Lommatzsch, 2003) do not suggest an overvaluation. - Declining wage growth has slowed unit labor cost growth. - Productivity-adjusted gross manufacturing wages, on average, are still high by regional standards. - Export growth and export profitability remain robust. - The variety of export products is rising. - Slovenia ranks favorably in competitiveness rankings (Lopez-Claros, Porter, and Schwab, 2006). ### Export performance and market concentration (paragraph 118 and figures) - Slovenia’s export performance lags that of other new member states, and remains heavily dependent on a few export markets. - Between 1993 and 2004: - EU-8 market share in the EU-15 increased from 2.2 percent to 4.7 percent. - Slovenia’s market share in the EU-15 remained relatively constant at about 0.25 percent. - Exports to markets outside of the EU-15, Balkans, and the USA have been steadily increasing at the expense of EU-15 exports. - Diversification within the EU-15 market is limited: - The four biggest trading partners—Germany, Italy, Austria, and France—accounted for 83 percent of total goods exports to the EU-15 and 49 percent of total exports to the world, respectively. - The sluggish growth in market share has been partly attributed to the slowdown in key export markets, in particular Germany and France, in the early half of this decade (IMAD, 2005). ### Competitiveness indicators and labor costs (figures referenced in paragraph 117 and adjacent text) - Real Effective Exchange Rates presented for 1998-2005 and 2001-05 (index bases shown as 1998q1=100 and 2001m1=100). - Labor productivity, nominal wages, and unit labor costs in manufacturing are shown for 2000-05 (annual percent change). - Export prices and nominal ULC, manufacturing sector, 2001-05 (2001q4=100, seasonally adjusted). - Gross monthly wages and GDP per employee in manufacturing, 2004, are plotted in logs (country positions shown for Slovenia, Slovakia, Hungary, Czech, Poland, Estonia, Latvia, Lithuania). ### Theoretical and empirical literature on quality and technological upgrading (section C, paragraph 119) - Trade literature emphasizes quality and technological upgrading for export competitiveness. - Theoretical references: Krugman (1980); Flam and Helpman (1987); Grossman and Helpman (1991); Posner (1961); Vernon (1966). - Empirical evidence cited: Brooks (2003); Schott (2004); Hummels and Klenow (2005); Hallak and Sivadasan (2006). - Key mechanisms: - Differentiation via greater product variety or higher quality sustains export markets. - Product innovation can create temporary monopoly profits until imitation/standardization reduces advantage. - Richer countries tend to export higher-quality goods; quality differences account for a substantial share of country differences in real income per worker. - Upgrading quality helps meet minimum requirements and reduce transaction costs in international trade. - The chapter proposes examining technological and quality content of Slovene exports as a key measure of sustained export competitiveness. ### Specialization in high-technology products — methodology (section D, paragraph 120) - Specialization analyzed via structure of exports and revealed comparative advantage (RCA) indices (Balassa, 1965). - RCA defined as ratio of share of a product in the country’s exports to its share in world (here EU-15) imports: - Formula noted: RCA_{s b} = (X_{s b} / X_{s t}) ÷ (M_{EU-15 b} / M_{EU-15 t}). - An index value of unity or greater indicates comparative advantage. - Data: - SITC three-digit (Rev. 3) export data, 1994–2004, from United Nations COMTRADE. - Classification into five factor-intensity groups (Krause (1984); Hinloopen and Van Marrewijk (2005)): - (i) human capital (skilled) labor-intensive products; - (ii) technology-intensive products; - (iii) unskilled labor-intensive products; - (iv) natural resource-intensive products; - (v) primary products. - Note: Appendix I contains detailed product classification. ### Structure of exports and RCA findings (paragraphs 121–124 and text tables/figures) - Structure of Slovenia’s exports to the EU-15: - Specialization in technology-intensive and skilled-labor-intensive goods. - Together, these account for around two-thirds of total exports. - Education and human capital context: - Slovenia’s ratio of number of students in tertiary education to total population was around 5 percent in 2003. - EU-25 average tertiary students ratio was 3.7 percent (Eurostat, 2005). - Slovenia ranked among the top four countries in the EU-25 in youth education attainment level in 2004. - RCA trends: - Competitiveness of technology-intensive exports gradually increased over the past decade. - RCA for technology-intensive exports has been greater than 1 since 2003, suggesting Slovenia’s exports to the EU-15 have been more competitive than the rest of the world’s. - RCA for unskilled labor-intensive exports has declined. - Alternative classifications and high-technology shares (paragraph 122): - Six classifications of high-tech and high-skill exports examined: factor intensity, labor skill intensity, manufacturing technology intensity (Hatzichronoglou, 1997), Dulleck et al. (2005) taxonomy including machinery/equipment/transport as high-technology, ICT goods and high-technology product goods. - Between 1994 and 2004: - Shares of exports with high-technology intensity and of high skill intensity each increased by around 5 percent. - Exports of high-technology industries goods increased by around 8 percent as a share of total exports. - The share of ICT industries remained at the same level over this period. - Comparative pace of technological upgrading (paragraph 123): - Slovenia is shifting to high-technology exports more slowly than other EU-8 countries, particularly Central European countries (Hungary, Czech Republic, Slovak Republic). - Exceptions where Slovenia advanced most: high-tech-product exports and high-skill-intensive exports. - Cross-country RCA comparison and interpretation (paragraph 124): - Slovenia held a more favorable initial competitive position in 1994 than other EU-8 countries under most technological classifications (except ICT industries). - Over 1994–2004, Slovenia’s RCA position has been relatively stable (position near the 45-degree line in RCA scatterplots). - CECs are generally above the 45-degree line, indicating faster advances in competitive position. - By 2004, many new member states have RCAs above 1 in various products, signaling stronger competitive positions. - In high-technology product and high skill intensity categories, Slovenia’s position improved and is close to that of the EU-8. - A regression on RCA levels for high-technology exports across 56 developed and emerging markets shows a slope less than the 45-degree line, suggesting a catch-up effect: countries with lower initial positions tended to grow faster in market share. - This catch-up effect implies specialization did not increase in products without an initial competitive advantage; these factors are tested more formally in Section F. *Source: _cr06250 - 117. Most indicators suggest that the competitiveness of the Slovene economy is* ### 125. In this study, quality is proxied using unit value ratios (UVRs) of manufacturing ### _cr06250 - 125. In this study, quality is proxied using unit value ratios (UVRs) of manufacturing ### Methodology: UVR construction and interpretation - Quality proxied by unit value ratios (UVRs) of manufacturing export goods: UVR for product i and country j = UV_i,j / UV_i,world, where UV_i,j is value of exports of product i by country j divided by its volume, and UV_i,world is the unit value of total world imports for product i. (Footnote detail preserved in source.) - Unit values calculated at the six-digit level of the Harmonized System Classification from the COMTRADE database. - Product-level UVRs aggregated using current-year shares as weights; country j’s export-structure weights are used in this chapter. - Common-basket approach used to ensure comparability between country and world benchmark. - Caveat noted: UVR increases can reflect quality upgrading or price inflation; alternative checks include using base-year constant weights (2000 used as base year in comparisons) and volume-based measures. ### Descriptive findings on Slovenia’s export quality and specialization (1994–2004) - Slovenia shows a positive change in country-level UVR between 1994 and 2004, indicating quality improvement in exports. - Pace of UVR improvement is lagging behind the EU-8, especially in high-technology exports; this holds across technological classifications. - For high-tech products, UVR increase under current-year weights is higher than under constant (2000) weights for Slovenia — indicating a composition shift toward products with higher UVRs (i.e., larger share of higher-UVR products). - In the CECs, the difference between current-year and constant-weight UVR changes is less evident, suggesting price effects may drive UVR increases more there. ### Empirical framework for market-share and UVR analysis - Market-share growth regression estimated (fixed effects, panel 1994–2004, 129 countries): ∆Share_j,t = α + β1 ∆Share_j,t-1 + β2 Share_j,0 + β3 ∆UVR_j,t + β4 ∆REER_j,t + β5 Trade openness_j,t + β6 FDI_j,t + ε_i,j - Controls: ∆REER (real effective exchange rate), Trade openness and FDI (percent of GDP). - Negative β2 implies catch-up effect. - UVR-growth regression estimated (fixed effects, logs): ∆UVR_i,t = α + β1 ∆UVR_i,t-1 + β2 UVR_i,0 + β3 ∆REER_i,t + β4 Trade Openness_i,t + β5 FDI_i,t + ε_i,t - Tests for catch-up, price effects (REER), and market-linkage effects (FDI, trade openness). ### Key empirical results: market-share regressions (summary of table) - Lagged level market share coefficient: consistently negative and significant (examples): -0.835, -0.924, -0.546, -0.867, -0.849 (Robust t-statistics reported in table). - Change in country UVR coefficients (examples): -0.122, -0.148, 0.241, -0.132, -0.2 (vary by sample; some significant). - Change in REER coefficients (examples): 0.44, 0.14, 0.548, -0.219, 0.44 (positive and significant in several samples). - Trade openness coefficient examples: 0.224, -0.062, 0.56, -0.428, 0.165 (significant in some samples). - Sample and fit statistics: Observations 997, 763, 270, 186, 540; R-squared 0.51, 0.45, 0.48, 0.52, 0.51; Number of Countries 118, 119, 31, 22, 65. ### Interpretation of market-share findings - Catch-up effect is significant: countries with smaller initial market shares tend to grow faster; speed of convergence differs across groups (developing vs. emerging vs. developed). - Trade openness sometimes positively related to market-share gains for emerging markets, but relationship is sensitive to group definitions. - REER appreciation shows a positive relationship with market-share improvements in emerging and developing economies (possible reverse causality via productivity gains/Balassa-Samuelson effects). - Quality upgrading (∆UVR) is important for emerging markets: for this group, UVR increases are positively associated with market-share gains. - For developed economies, the relationship between ∆UVR and market-share change is negative and significant on average; interaction evidence suggests that for a given initial share, UVR growth helps retain market share. - For developing economies, negative relationship may reflect structural issues or price effects captured in UVRs. ### Key empirical results: UVR-growth regressions (summary of tables) - Lag level (initial UVR) coefficients are negative and highly significant across samples (examples): -0.391, -0.295, -0.886, -0.847, -0.847, -0.519 — indicating catch-up in UVR growth. - Lagged dependent variable coefficients vary (examples): -0.305, -0.361, 0.141, 0.151, -0.038, -0.019. - Change in REER coefficients generally small and not robustly significant (examples): 0.09, 0.054, -0.044, 0.042, 0.092, 0.127. - FDI and trade openness often enter positively for UVR growth: FDI example coefficients include 0.027, 0.051 (significant in some specifications); Trade openness examples include 0.213, 0.396 (significant in several specifications). - Sample and fit statistics: Observations examples 1127, 999, 873, 376, 562, 0541; Number of Countries examples 127, 118, 127, 119, 125, 115; R-squared examples 0.29, 0.28, 0.32, 0.31, 0.11, 0.04. ### Interpretation of UVR-growth findings - Strong catch-up effect in UVR: countries with lower initial UVR experience faster UVR growth. - Market spillovers matter: trade openness is positively and significantly related to UVR growth across most samples and periods. - FDI positively related to UVR growth, especially for emerging markets — supporting role of knowledge spillovers and market linkages in quality upgrading. - REER appreciation is not a dominant or robust driver of UVR growth in the regressions. ### Slovenia-specific diagnosis (indicators and implications) - Slovenia’s FDI (2000–04) and outcome indicators (text table) compared to EU-8 and EU-15: - Slovenia: FDI 2.3 (Percent of GDP), R&D 1.5 (Percent of GDP), US Patents 1865 (Total), School enrollment, tertiary 17 (In percent of Gross), Labor force with tertiary education 6.3 (In percent of total), Manufacturing Productivity Growth, 2000-04 1 (In percent). - EU-8 average: FDI 5.0, R&D 0.8, US Patents 1654 (Total), School enrollment, tertiary 23, Labor force with tertiary education 7.8, Manufacturing Productivity Growth, 2000-04 3.7. - EU-15 average: FDI 4.6, R&D 2.0, US Patents 1,951 (Total), School enrollment, tertiary 60.2 (note: table formatting in source), Labor force tertiary 10.0, Manufacturing Productivity Growth examples 2.0. - Despite higher R&D spending than the CECs, Slovenia produced fewer commercial patent applications. - Slovenia has very high tertiary school enrollment, but labor force share with tertiary education is smaller than EU-8 and EU-15 averages. - Conclusion: weak market linkages (lower FDI, weaker translation of R&D into patents, lower tertiary-educated labor-force participation) likely contributed to slower quality upgrading in Slovenia relative to EU-8. ### Policy implications and recommended directions - Strengthen market linkages to accelerate quality upgrading and export-market performance: - Create a more conducive environment for investment (to raise FDI and associated knowledge spillovers). - Enhance mechanisms that convert R&D spending into commercial applications (patents, product development). - Improve labor-market absorption of tertiary-educated workers into productive roles. - Recognize differential effects across country groups and industries: policies should consider sectoral heterogeneity in how catching-up, spillovers, and investment translate into quality and market gains. - Suggested empirical extensions to inform policy design: - Incorporate gravity-model variables (trade distance) and interactions with technological/quality gaps. - Use volume-based export data to disentangle price vs. quantity effects on UVRs. - Account for product variety in isolating quality effects (as variety can distort UVR–quantity relationships). - Conduct more disaggregated, industry-level empirical analysis to identify where investment and spillovers most effectively raise quality and market share. - Overall recommendation: to boost export competitiveness Slovenia should improve market linkages (FDI, trade integration) to enable technological upgrading and productivity improvements. *Source: _cr06250 - 125.* ### References ### _cr06250 - References ### References - Balassa, B., 1965, “Trade Liberalization and Revealed Comparative Advantage,” Manchester School, Vol. 33, (No. 2), pp. 327–45. - Brooks, Eileen, 2003, “Why Don’t Firms Export More? 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Available via the Internet: http://www.weforum.org/site/homepublic.nsf/Content/Global+Competitiveness+Programme%5CGlobal+Competitiveness+Report - Mahmood, A., 2000, “Export Specialization and Competitiveness of the Malaysian Manufacturing: Trends, Challenges and Prospects,” paper presented at the Conference on International Trade Education and Research: Managing Globalization for Prosperity, Melbourne, October 26–27. - Peneder, Michael, 2001, Entrepreneurial Competition and Industrial Location (Cheltenham, UK: Edward Elgar). - Pitigala, N., 2005, “What Does Regional Trade in South Asia Reveal About Future Trade Integration? Some Empirical Evidence,” World Bank Policy Research Working Papers, No. 3497, (Washington: World Bank). - Posner, M., 1961, “International Trade and Technical Change,” Oxford Economic Papers, 13, (No. 3), pp. 323–41. - Schott, Peter, 2004, “Across-Product versus Within-Product Specialization in International Trade,” Quarterly Journal of Economics, Vol. 119 (No. 2), pp. 647–78. - Vernon, R., 1966, “International Investment and International Trade in the Product Cycle,” Quarterly Journal of Economics, Vol. 80 (May), pp. 190–207. - World Bank, 1998, “Slovenia Trade Sector Issues,” Report No. 18456-SLO (Washington: World Bank). ### Appendix 1: Classification of Export Categories According to Factor Intensity - Column headings (as presented): Primary Products | Skilled Labor-Intensive | Technology-Intensive | Natural Resource-Intensive | Unskilled Labor-Intensive - Selected entries under each category (verbatim excerpts from the listing): - Primary Products: - Fuel wood/wood charcoal - Beverage non-alcohol nes - Meat/offal presvd n.e.s - Electric current - Metalworking machine nes - Flour/meal wheat/meslin - Sugar confectionery - Wood simply worked - Hide/skin (ex fur) raw - Edible products n.e.s. - Milk pr exc buttr/cheese - Jute/bast fibre raw/retd - Cereal meal/flour n.e.s - Eggs, albumin - Wood chips/waste - Cork manufactures - Uranium/thorium ore/conc - Tobacco, manufactured - Nf base metal waste nes - Articles of rubber nes - Pearls/precious stones - Ships/boats/etc - Aluminium ores/concs/etc - Vegetables,frsh/chld/frz - Pulp and waste paper - Fish/shellfish,prep/pres - Chocolate/cocoa preps - Veg root/tuber prep/pres - Fixed veg oil/fat, soft - Fruit presvd/fruit preps - Man-made fibres nes/wast - Animal oil/fat proces"d - Beef, fresh/chilld/frozn - Stone/sand/gravel - Ferrous waste/scrap - Fish/shellfish,prep/pres - Skilled Labor-Intensive: - Pigments/paints/varnish - Dyeing/tanning extracts - Cotton fabrics, woven - Cut paper/board/articles - Perfume/toilet/cosmetics - Leather manufactures - Veneer/plywood/etc - Men/boys wear, woven - Baby carr/toy/game/sport - Made-up textile articles - Woven textile fabric nes - Tulle/lace/embr/trim etc - Articles nes of plastics - Footwear - Knit/crochet fabrics - Articles of apparel nes - Headgear/non-text clothg - Trunks and cases - Floor coverings etc. - Pottery - Watches and clocks - Musical instrums/records - Adhesives/Starches/glues/etc. - Technology-Intensive: - Meters and counters nes - Rotating electr plant - Domestic equipment - Mineral manufactures nes - Lighting fixtures etc - Office/stationery supply - Fans/filters/gas pumps - Taps/cocks/valves - Sanitary/plumb/heat fixt - Metal machine tool parts - Electrical equipment nes - Radio-active etc matrial - Television receivers - Photographic equipment - Optical fibres - Pearls/precious stones - Electric circuit equipmt - Steam/vapour turbines - Telecomm equipment nes - Aircraft/spacecraft/etc - Computer equipment - Office machines - Medical etc el diag equi - Instruments and measuring devices (Measure/control app nes) - Natural Resource-Intensive: - Wood manufactures n.e.s. - Glassware - Mineral manufactures nes - Lime/cement/constr mat"l - Clay/refractory material - Civil engineering plant - Metal salts of inorg acd - Zinc - Lead - Nickel - Copper - Silver/platinum etc - Iron/steel bars/rods/etc - Base metal manufac nes - Base metal h"hold equipms - Base metal ore/conc nes - Natural abrasives n.e.s. - Coal non-agglomerated - Iron ore/concentrates - Unskilled Labor-Intensive: - Leather manufactures - Furniture/stuff furnishing - Clothing accessories - Women/girl clothing woven - Mens/boys wear, woven - Women/girl wear knit/cro - Articles of apparel nes - Men/boy wear knit/croch - Textile leather machinery (textile/leather machinry) - Misc manuf articles nes - Plastic nes-primary form - Plastic sheets/film/etc - Articles of rubber nes - Made-up textile articles - Appendix 1 (continued) — additional primary and categorized items (verbatim excerpts): - Primary Products continued: - Sulphur/unroastd pyrites - Oil seeds-not soft oil - Briquettes/lignite/peat - Butter and cheese - Rice - Fruit/nuts, fresh/dried - Other crude minerals - Margarine/shortening - Cheese and curd - Live animals except fish - Fixed veg oils not soft - Coffee/coffee substitute - Residual petrol. prods - Crude animal mterial nes - Worn clothing etc - Wool/animal hair - Cotton - Tea and mate - Cereal grains nes - Maize except sweet corn. - Precious metal ore/conc. - Veg text fibre ex cot/ju - Fertilizers crude - Fish,live/frsh/chld/froz - Wheat/meslin - Natural rubber/latex/etc - Rubber synth/waste/etc - Synthetic spinning fibre - Tobacco, raw and wastes - Crustaceans molluscs etc - Liquid propane/butane - Coke/semi-coke/retort c - Fish,dried/salted/smoked - Cork natural/raw/waste - Petrol./hydrocarbon gas - Natural abrasives n.e.s. - Oil seeds etc - soft oil - Base metal ore/conc nes - Barley grain - Furskins/pieces, raw - Iron ore/concentrates - Coal non-agglomerated - Cocoa *Source: _cr06250 - References (PDF).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06250.pdf_