Universal versus contextual rationality: a case of Slovenia

2.1Strong localism

Slovenia is a very small but extremely diverse country. It covers the area of 20.273 km², which is roughly half the size of Switzerland, and yet it includes four distinct European natural habitats: the mountainous Alps, the limestone Dinaric karst area, the fertile Panonian plain and the ardent Mediterranean. The landscape is characterized by high mountain ranges, which are separated by lower lying valleys. Only one sixth of its territory is level country (Plut, 1999) Four neighbour countries Italy, Austria, Hungary and Croatia have throughout the history tried to control some of its parts. Habsburg monarchy was first to include all of the Slovene regions. But even under Habsburg rule southwestern parts were under Italian influence and northeastern regions under Hungarian influence.

Mountainous terrain made transportation and communication between valleys difficult, hence local communities had developed in some sort of self-sufficient isolation. Neighbouring valleys have evolved different dialects of speech and different economies, depending on the availability of natural resources. They were loosely connected into larger regions of Dolenjska, Kranjska, Štajerska, Gorenjska and Primorska. The loyalty of people belonged firstly to their local community and secondly to their region. Not until 1848 did Slovene intellectuals issue the first political programme for an United Slovenia and started propagating the idea of Slovenia as an autonomous republic within Austro-Hungary or as an independent state.
Even at the end of 19^th century, when the country gradually began to industrialize and the lack of available land for cultivation caused a permanent state of crisis for peasants from all over Slovenia, strong local cohesion and “valley mentality” have survived almost intact.¹⁰ Since there were no major industrial towns to migrate to, peasants who were unable to support themselves and their families had to move to other parts of Europe and primarily to the United States. Those who stayed, continued with a basically subsistence based form of farming, where farmers traded their surplus agricultural and traditional cottage products on small neighbouring markets. Although this system has prevented farmers from engaging in a capitalist process of modernisation, it simultaneously prevented the farming communities from destroying their traditional village mutualism and co-operation.
At the end of the 19^th and the begging of the 20^th century the country gradually began to industrialise. But it was not an usual pattern of fast industrialisation in a few urban centres that happened in Slovenia. It was rather a community-based industrialisation, where foreign owners had built factories in different valleys, depending on the availability of natural resources and cheap labour (Jaklic, 1999). Factories have served as an additional source of income for peasants, which had still primarily engaged in an agricultural activity and considered themselves to be a farmers and not workers. This arrangement had survived the First World War and the fall of the Habsburg monarchy. In a new Kingdom of Serbs, Croats and Slovenes (shorter: Yugoslavia), Slovenia was the most industrialised and most developed region. Foreign owners took advantage of the fact that it had ceased to be a supplier of raw materials and intermediate products for Austro-Hungarian Empire and was instead in position to supply an emerging Yugoslav market with high value finished products. As agricultural prices dropped again, an increasing number of peasants sought to supplement their agricultural income with industrial wages, which have caused the rapid growth of new factories. In this way had local valley communities managed to keep their traditional agriculture-based way of life and industrialisation had not only not broke strong communal bonds but had in fact enabled “valley communities” to remain in blissful isolation with relatively unchanged costumes and conducts until the Second World War.
The WWII has brought the new communist regime in power, and along came the new economic system – socialism. But Yugoslav socialism was in a few distinct ways different from the Soviet kind of socialism. Yugoslavia never succeeded in building up a strong institutionalised central planning system. Continuous changes and reforms made it impossible for central planners to gain a strong position like in other East European countries during that period (Prasnikar, Prasnikar, 1986). Politics were conducted through highly shifting procedures viewed from the formal dimensions of the system and hardly anyone could learn to master one system and plan strategies before institutions and formal rules were changed again. Local politicians had much more political and economical power than their East-European counterparts and they have used it to bolster economic development in their “favourite” regions, that its in valleys that they have originated from or where they had currently lived.
Unlike in Russia and other East-European countries Yugoslav partisans that have fought in a war were not drastically affected by political purges and bogus trials that would have eliminated potential adversaries to the ruling clique and at the same time ruined all possibilities of creating some sort of informal network for allocation of government funds. In Yugoslavia the politics of allocation was much more a game of give and take within a network of former partisans which were acting in dual roles: as politicians and entrepreneurs. Having a vast political and economical power they were able to smooth transition into socialism to such an extent that there were no major changes in life of peasant workers (Kristensen, Jaklic, 1998). The latter have expected from their new leaders to provide them with a secure and steady jobs in a factory that would grant them social security but would not be to demanding, challenging or time consuming, so that in the afternoon they could still work on their farms or in their communities.
Throughout the socialist years localism and self-centeredness of valley communities have thrived. People have lived and worked in their own communities and had almost not migrated to larger cities. In 1981 less than 40% of the people lived in urban areas.¹¹ They were happy with routine, undemanding and modestly paying jobs which allowed them to use their craftsmanship and entrepreneurial abilities in the local “grey economy” that had generated them additional income as well as respect and status in local community.
But the socialist system could not last forever and when it has collapsed it was expected that the above explained communal life would disintegrate along with the old socialistic companies. Price and (international) competition became more and more important factors in a new market economy. But as we will try to show with the case of merger of two Slovenian banks, the traditional local life is still very strong.

2.1.1Localism in transition: The case of banking sector

The idea behind the merger of Slovenian second largest bank Kreditna Banka Maribor (Credit Bank of Maribor - KBM) and one of small regional banks Komercialna banka Nova Gorica (Commercial Bank of Nova Gorica - KBNG) was sound and economically viable. In the beginning of the 90’s the larger Slovenian banks, which possessed around 70% of the bank capital in Slovenia, were unable to operate and were in need of rehabilitation. The reason for their financial failure originates from some peculiarities of Yugoslav system of self-management. The owners of Slovenian banks where companies that were at the same time their main clients. But actual control of a bank was not in the hand of its owners but in hand of various politicians and bureaucrats. As a rule, each region had a few major companies and a communal bank whose main purpose was to service them and local community. Bank performance was usually not measured in financial terms but in its ability to provide its clients with favourable loans for investing in production or for improving the living standard of the local community.

Because of the high inflation, real interest rates throughout the 80’s where in fact negative. This benefited companies by enlarging their actual equity and improving their capital structure¹². But it was devastating for banks that had suffered heavy losses and were able to operate only with regular monetary boosts from the central bank, which kept issuing new money emissions. Coupled with bankruptcy, financial troubles of their clients and losses from the exchange rate differences, majority of Slovenian banks was in need of serious rehabilitation in the beginning of 90’s. Their rehabilitation was one of priority tasks of the new government and the central bank. The control of banks undergoing rehabilitation was transferred to the state Agency for Bank Rehabilitation and the state bonds were issued to replace the non-performing assets and to prepare the banks for future privatisation (Ribnikar, 1994).
In the beginning of the 90’s, after the initial shock of separation and loss of Yugoslav market have subsided, there were around 30 banks in operation. Most of them were small regional banks, and even the largest two of them were small in comparison with other European banks. Slovenian banks were not as efficient as foreign banks and being also so small, it was feared that once the foreign competition arrives, it would destroy Slovenian banking system. Thus an idea to merge these regional banks into a two or tree larger banking groups (pillars) was endorsed both by the Central Bank and by the government. Creation of a few larger universal banks would rationalise operations, uniform information systems, cut costs and generally make banks more competitive, flexible and stronger. With their extensive local network of branch offices, reduced costs, and better knowledge of local conditions, such banks would be able to resist and even fight foreign competition. It was expected that that would also benefit the corporate sector and economy as a whole.
Since KBM was almost rehabilitated and KBNG was still in trouble, Agency for Bank Rehabilitation, together with Bank of Slovenia (the central bank), has decided that the most efficient way to rehabilitate the latter was to join both banks into a New Credit Bank of Maribor (NKBM). Beside immediate economical benefits of merger they wanted to give a signal and to set a precedent, which would encourage other small banks to form a strategic partnerships and eventually merge into a few strong and efficient banking pillars.
However, there was this issue of strong localism. KBNG covers the area of Primorska, border region that is heavily influenced by Italy and Italian culture. KBM has it headquarters in Štajerska, border region that is traditionally connected with Austria and German culture. Bankers from Primorska, together with local people and companies, could not tolerate that their bank would be acquired by “foreign” bank; that is by bank from other region. They felt betrayed and even demonstrated on the streets against the merger (or acquisition, as they rightfully perceived it). They reasoned that the new bank would not care enough for their local community and would use them mainly as deposit collectors. Because headquarters of the new bank would be in Maribor, they feared that companies from Štajerska would be better served than companies from Primorska.
But it was not a happy marriage. Ex KBNG became factually a set of branch offices of NKBM. They were allowed to perform routine task and to approve loans up to a certain limit. The new scheme has caused massive disapproval among the employees as well as among client companies from Primorska. The system just didn’t work and nothing the management of NKBM in Maribor could do would improve it. After few years and a number of changes in the management boards of their branches in Primorska, they have realised that the merger is just not working and decided to apply for permission for separation of the two banks. The CEO of NKBM has explained that they were having troubles in overcoming regional and sociological closeness of banks. Contextual factor, which had seemed so unimportant in an initial proposal and evaluation of the merger, has proved out to be an obstacle too big to overcome even for the experienced management of the second largest bank in Slovenia.
Even though the idea was probably right, its execution was evidently wrong. Slovenian banks are certainly too small for international competition and should somehow merge together. But the mergers should not be done by some decree of authorities, especially if those authorities are oblivious to the contextual differences between different banks. If the authorities had been pursuing holistic approach to rationality they would try to create such an environment where banks would realise that they have to merge in order to survive and be successful. They should probably have to encourage gradual cooperation of the banks, first through mutual collaboration on certain projects like computer support or joint network of ATMs. Only after the managements of different banks have gained confidence in each other and their owners realised that the only way to achieve satisfactory return on equity was through the economy of scale would banks voluntarily decide to join one of the few banking groups concentrated mainly around the two major Slovenian banks. Such a mergers would be on the partnership basis, where regional banks could still serve local companies and communities (where they are very good at accessing the risk) while enjoying the benefits of operating at the economy of scale in some support functions.¹³ Hasty and thoughtless decision about merger, made by people who did not take into a consideration soft institutional constrains and local patriotism of Slovenian organisations has in fact backfired and actually stopped the process of gradual merging of the Slovenian banks which was under way. Alarmed by the negative results of merger of KBM and KBNG other banks have decided to wait and stay independent as long as it was possible.