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In terms of economic development, Slovenia ranks around the middle among the EU Member States; most of its lag behind the EU average is explained by the productivity gap. Slovenia’s convergence with more advanced countries in terms of productivity was interrupted during the crisis and continued only slowly as economic growth picked up again. The relatively high GDP growth rates after 2015 have mainly been achieved through increased employment, while productivity growth remained moderate.  

Weaker productivity growth since 2009 has, in addition to lower within-sector productivity growth, also been due to less intense sectoral shifts. At the turn of the millennium Slovenia was still in the process of intense economic restructuring in terms of the reallocation of production factors from less to more productive sectors.  In the recent period these changes have been much less intense and the structure of the economy has also come very close to that in the EU on average. The impact of the reallocation of production factors to more productive sectors (i.e. the contribution of between-sectoral shifts to overall productivity growth) has therefore also declined significantly since 2009. Lower than before the crisis has also been within-sector productivity growth, resulting entirely from slower firm-level growth. On the other hand, the reallocation of labour to more productive firms within the same sector (improvement in allocative efficiency) has had a more favourable impact on within-sector productivity growth than before the crisis. 

Since 2009 productivity growth has slowed down in most sectors. With relatively faster growth in foreign demand in this period, the strongest productivity growth has been recorded in technologically intensive and export-oriented manufacturing activities and transport. Significant productivity gains have also been seen in administrative and support services, mainly owing to rapid growth in employment agencies related to increased labour demand. The least favourable developments relative to the pre-crisis period have been recorded in ICT services, especially telecommunications, and in the construction sector, which since 2009 has been faced with lower demand as well as changes in its structure. Both sectors also stand out in a negative way compared to those in the EU. 

In most sectors the productivity slowdown has derived mainly from a lack of capital deepening. Capital deepening remained weak even during the economic recovery (i.e. after 2013), when the investment environment was already improving significantly. The low level of investment in predominantly domestically oriented services stands out in particular, which is a consequence of slower and later recovery of the domestic market after the crisis, but also of lower investment in transport infrastructure and housing construction. Investment decisions have generally also been marked by increased uncertainty related to the past crisis and, more recently, by slowing growth in foreign demand and rising global uncertainty. 

Since 2009 lower productivity growth rates than in the pre-crisis period have also been recorded at the level of individual groups of firms according to size, export orientation and technological intensity. The lowest rates have otherwise been characteristic of smaller firms, firms oriented predominantly to the domestic market, firms with lower technological intensity and enterprises in knowledge-intensive services. These groups of firms mostly (with the exception of firms in knowledge-intensive service activities) already had relatively low productivity growth in the pre-crisis period, but after the onset of the crisis their gap with other groups widened further. This might be explained by a slower recovery of the domestic market and a lack of access to finance for smaller firms in the first years after the crisis. Unfavourable developments in knowledge-intensive services can, to a great extent, be attributed to a decline in productivity in telecommunications, but also to modest growth in computer programming and data processing. On the other hand, higher productivity growth in more export-oriented and technologically more intensive firms over the whole observed period since 2002 points to a positive impact of the integration of firms in global value chains and higher technological intensity of production on productivity.  
   
Slovenia, like other countries, has a large number of less productive firms and a smaller portion of highly productive ones, but this asymmetry to the right is one of the smallest in international comparisons. The differences in productivity between firms are also relatively small, also due to the absence of large (highly productive) firms by international standards. Data show that these differences have been narrowing, especially since 2009 (a declining ratio between the productivity levels of firms in the 90th and 10st percentiles of productivity distribution), while they have been widening in many other EU Member States. A more detailed analysis shows that the ratio between the average productivity of firms in the top and bottom 10% of productivity distribution has also declined and that their productivity movements are significantly affected by the entry and exit of firms. These effects disregarded, average productivity growth in existing firms in the top 10% has been higher than growth in the bottom 10%. 

After the sharp deterioration at the onset of the crisis, the competitiveness of the economy improved in the following years despite only moderate productivity gains. Since 2010 labour costs have been rising at a slower pace than productivity, which – together with increasing import demand from the main trading partners and stronger integration into global value chains – contributed to a rebound in Slovenia’s export market share growth after 2012. In the course of 2018 favourable developments came to a halt, mainly due to the geographical orientation of exports to the slower growing EU market, and, amid rising unit labour costs (especially in manufacturing), cost competitiveness indicators also started to deteriorate gradually.  

Further economic and hence social development will crucially depend on the capacity of the country to boost productivity growth. The latest cost increases are gradually undermining the competitiveness of the economy, which could, coupled with lower growth in foreign demand, further dampen economic growth in the coming years. Also, due to demographic trends, increasingly scarce labour supply will no longer enable high GDP growth rates with such a high contribution of the increase in employment as in previous years. Therefore, it will be crucial to focus on strengthening long-term drivers of productivity growth in particular. In previous years some of them had adverse developments (investment in R&D, in particular public investment, innovation activity of enterprises, ICT investment), while in others changes have been slow considering the needs (for example, adapting knowledge and skills to development challenges).

Economic policies to accelerate productivity growth have to create the conditions for (i) faster productivity growth across all firms, (ii) a further breakthrough of the most productive firms and (iii) a spillover of knowledge, best practices, etc. from the most productive to smaller l(ess productive) firms. Policy measures should focus on increasing innovation, accelerating digital transformation and further strengthening the internationalisation of companies. It is essential: 

• To increase investments, especially those related to digital transformation and transition to industry 4.0. This primarily involves investment in knowledge (formal and informal education, lifelong learning), research, development and innovation (public and private funding), new technologies and knowledge-intensive services. Besides by domestic funding, these goals could also be achieved by appropriate setting of priority areas in using EU funding. With regard to Slovenia’s strategic objectives,  it is also necessary to pay attention to the sustainability of development when investing to increase productivity. 

• To create an environment that promotes innovation and entrepreneurship and is predictable in the long term. The main challenge is to ensure the long-term stability of support measures at all stages of innovation and marketing and to create a conducive business environment (for example, by further reducing administrative barriers and the length of proceedings) with an emphasis on appropriate support for smaller enterprises.   

• To strengthen cooperation between firms, the education sector and research institutions, and also between firms of different sizes, the latter primarily with a view to better exploiting the innovation potential of small enterprises and services. The strategic research and innovation partnerships already established can provide a good basis for strengthening cooperation between the various actors. 

• To ensure appropriately qualified human resources to meet the needs of the future (including a stimulating environment for this type of workforce), in particular address the shortage of science and technology experts (for example, ICT specialists and engineers) and strengthen the digital literacy of the population (through formal and informal education and lifelong learning). 

• To ensure appropriate infrastructure and in particular enhance investment in infrastructure for digital connectivity and sustainable development (for example, for sustainable mobility, renewable energy sources, etc.).