Croatia slowly begins to understand that relying on a single sector, such as tourism, is not the best formula for a sustainable development. The share of industry exports in total Croatian exports is among the lowest within the new EU member states.
Industrial production in Croatia accelerated, picking up at the strongest monthly growth rate among EU countries, according to figures from the European Statistical Office. Seasonally and calendar-adjusted industrial production in Croatia jumped 4.5 per cent in June from a month earlier when it increased 1.8 per cent, Eurostat reported. According to available Eurostat data, Croatia has taken the leading position among the EU countries in monthly production growth, followed by Romania with 1.7 per cent, the Czech Republic and Finland with 1.5 per cent.
However, Eurostat states that Croatia was among the countries with the largest decline in industrial production last year. Comparing year to year (December 2018/December 2017) it was down 6.6 per cent. Only Ireland (19.8) and Spain (6.7) recorded a greater fall than Croatia. Following these indicators, the growth forecasts for Croatia’s GDP in 2019 are reduced. Thus, it is now expected to grow 2.6 per cent instead of earlier forecasts of 2.8 per cent. This means that Croatia is still one of the few countries that, even in these good years, has failed to achieve at least 3 per cent of GDP growth for the economy, which would create the preconditions for a major breakthrough.
Such lean Croatian growth rests on tourism and retail growth, while industrial production has been steadily declining for the past six months. Part of this decline has been related to the crisis in Uljanik (read more). There are also some concerns about the food production, which is related to the situation in Agrokor (read more).
Manufacturing and GDP growth
Croatian Chamber of Commerce analysts announced that total industrial production volume in Croatia in 2018 was 9.5 per cent lower than in the pre-crisis year of 2008. Other Central and Southeast Europe (CSE) countries increased their production and had a GDP growth substantially higher than 3 per cent. Comparisons with other countries in terms of industrial production are devastating for Croatia. The Czech Republic, Slovakia or Romania have significantly increased their industrial production (by 20 to 30 per cent), while no significant developments in Croatia have taken place. Consequently, the share of industrial production in Croatian GDP has been reduced from close to 20 per cent in 2000 to about 15 per cent today. That is why tourism has risen from the former 15 per cent to over 20 per cent today.
In 2013, when the European Commission singled out the manufacturing industry in its Competitiveness Report as the engine for the future development of the European economy, many interpreted it as a formal confirmation of the turn in European economic policy that has been going uphill since the beginning of the financial crisis. In those years, in a time of recession, few have addressed industry prospects of Croatia. More recently, however, there is a growing awareness that relying on a single sector, which is extremely sensitive to external shocks as tourism, is not exactly the happiest formula for sustainable development. The reasons for the interest in the industry should be sought in its spill over potential both within the sector and towards other sectors of the economy. Some estimates suggest, for example, that the contribution of industry to research and development is almost four times greater than its impact on GDP. Not all industry sectors have the same growth potential. To put it simply, it does not matter whether a country participates in a standardized low value-added production segment or in knowledge and technology-intensive parts of the production chain, such as research and development, design, etc. Labor-intensive activities can provide impetus to growth at lower levels of development, but the transition from the middle to the high level of income requires the strengthening of competitiveness in the sophisticated segments of the production process and, ultimately, the development of domestic innovation competences.
Croatia’s delayed development
The Croatian industry is different from other CSE countries. Much has already been said about the processes that took place in the early stages of transition from communism, but it is worth reminding that due to a combination of war, internal problems, inadequate or non-existent industrial policy and late integration of the regional, European and world economic integrations, foreign investment in manufacturing activities were significantly lower. Moreover, while other CSE countries were building their competitiveness on the market of the old EU member states, Croatian producers were significantly impeded from accessing this market until the second half of the 2000s, due to the late signing of the Stabilization and Association Agreement.
All the above-mentioned factors resulted in a decline of the industry share in employment and added value. It was to be expected that this trend could be reversed by joining the EU. But, in 2018 only Latvia had a lower share of manufacturing in GDP, while the share of industry in employment was lower only in Lithuania and Latvia. In the Višegrad Group countries, as well as Slovenia and Bulgaria the share of industry in employment is higher than in Italy and Germany.
According to high-tech intensity criterion, Croatia is at the frontend of the group of new EU member states, with the second lowest share of high-tech products. Moreover, Croatia is the only one in the group of new EU member states where the share of high technology intensive products in the value added of industry does not exceed 30 per cent. Industrial development in CSE has been stimulated by moving production from developed EU member states. The primary motive for the relocation was to take advantage of the low labor cost in CSE. An analysis of the structure of exports and the share of industry in total exports also shows an unfavorable picture for Croatia. The share of industry exports in total exports is among the lower in the new EU member states, as is the share of “high-tech” exports in the structure of exports of manufacturing.
All of the above suggests a low competitiveness of Croatian industry. However, to get a clearer picture of which sectors are successfully operating on the international markets, it is necessary to consider the competitiveness of individual segments within the industry. Competitiveness in the technology-intensive segment can be assessed by the OECD division of industries: technological intensity into low, moderate-low, moderate-high and high-tech industries. The ability to compete in a particular market segment can be determined by looking at the pattern of trade and the relationship between unit values of imports and exports. The increase in the unit value ratio of imports and exports is commonly thought to suggest an improvement in competitiveness and vertical intra-industrial trade. Also, close unit values of imports and exports suggest the existence of horizontal intra-industrial exchanges characteristic of similar stages of development. By applying the procedure described above, it is possible to identify differences in the competitive profile of certain segments of the manufacturing industry in Croatia and CSE countries.
In Germany and Italy, for example, highly and moderately high technology intensive industries are characterized by a vertical exchange in which unit export values outweigh the same import values. The above applies to other subgroups in Italy. The pattern of exchange in the CSE countries is very similar to that of Germany, which is to be expected given the integration of these countries into the production chains of German manufacturers.
Croatia, however, shows a pattern contrary to all that has been said. With the exception of the moderately high technological intensity sector, where the pattern of horizontal trade is dominant, in all other segments of the industry, unit value of exports is lower than that of imports. However, even in industries of moderately high technological intensity, unit value of imports outstrips those of exports, but in a proportion commonly taken as an indicator of horizontal rather than vertical intra-industrial trade. The above form is characteristic of countries facing loss of competitiveness and import orientation of the economy, which are all features of Croatia.
This, of course, does not mean that in Croatia there are no industries characterized by a positive ratio of export and import unit values. The highest unit value ratios are in the highly sophisticated electronics industries, automotive-related sectors, and arms and ammunition manufacturing. On the other hand, representatives of the wood and textile industries and industries characterized by some of Croatia’s chronic large and medium-sized losers are at the frontend.
Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.