“It is time to play the music” or the Muppet show in Croatia

Croatia's Prime Minister Andrej Plenković (European Parliament, CC BY-NC-ND)

Three years after the accession process has been accomplished but another government in Zagreb is facing the same difficulties. Will it stand up to the problem or re-sing the song?

The new Prime Minister of Croatia, Andrej Plenković looks at the whole set of difficulties. The list begins with high, 30 per cent level of poverty and social exclusion. 90 per cent of Croats face at least some difficulties in making month’s ends meet. Average rate of unemployment remain in Croatia at 15 per cent, the northern regions of Slavonia, Lika, and central Croatia are reaching 30 per cent level. The best situation is in Dalmatia and in the service sector during the summer season, when unemployment is significantly reduced and the labor force from other regions of Croatia and from abroad (Croats from Bosnia and Herzegovina) are migrating to the seaside and the tourism industry. This is not, however, a permanent solution to the problem. The prices of land and estates are several times lower in the northern areas of the country than at the coast. Almost half of the arable land lays in fallow. Clearly, the tourist sector is very important but the fact remains that deep economic division within society often brings negative political and economic consequences.

Adding to the social problems, economy of Croatia is not doing very well. Despite natural wealth of the country, Croatia is importing, for example food products and electric energy, and the trade balance is negative with export covering only 60 per cent of imports. It is a result, on the one hand, of demanding European market and existence of strong and experienced EU-based companies, that easily enters Croatian market. On the other hand, however, it shows how much investment in technology and innovation is required in Croatia. Full access to the European funds was seen as a remedy to the troubles.

EU funds

Accession of Croatia to the EU has not yet brought the expected benefits. Zagreb hoped for the influx of the EU funds into the state economy. For a long time, Croatia hardly made use of the EU funds (according to some sources, on the level just above what the country was paying into the EU budget), so the results from this year has been optimistic. In the first half of 2016 Croatia withdrawn over EUR500m from the common European budget. This result almost double the amount withdrawn overall in 2015 (EUR558m) and in 2014 (EUR548m). Most of the funds powered development of transport and environmental protection, entrepreneurship, investments in the renovation of student dormitories, research projects etc. Yet, it is much too early to reap the European fruits. Firstly, the money hasn’t had enough time to “turn around” the Croatian economy. Secondly, how much of the spending will indeed be pumped in Croatia’s economy than into foreign companies. Tenders and projects in the construction sector, transportation and environmental protection are usually open to well-prepared investors from other EU states, Turkey or China. Transfer of technologies also goes from the West to the East rather than the other direction. To protect environment Croatia will rather buy technologies and consult Western advisors than produce and implement some new solutions on its own. At least not in such a short period of time. Therefore it is up to the state to be able not only to use the EU funds but to absorb them into the domestic economy, and, what is equally important, to redistribute the newly created wealth within the society. The time will show whether Andrej Plenković will stand for it and let the money into the domestic companies and further into society or will mention the well-known “we stand for European integration”.

How much Croatian state in the Croatian economy?

What is clear in the region is fact that despite liberal slogans of free market, liberal values and support for entrepreneurship, Croatian governments were very much involved in management of Croatian economy. And so does the new government choosing Keynesian path rather than the one of Hayek and invisible hand of the market. The ongoing years of crisis, international uncertainty and political populism along with realities of the EU has forced Zagreb to promote local champions and focus on few areas of economy, where the country has chances in development and competition on the demanding European market. These are transportation and foremost energy industry. Agriculture can compete as a part of eco-industry, producing high quality food on relatively small scale on relatively small farms. As such, agriculture will not be able to provide high enough capital concentration to become leading sector in development of the country. Besides, Croatian authorities do not want their economy to be based solely on agricultural sector.

There is however a long way to diversification. So far, food products remain most important part of exports, more important than oil and ships. Among two other sectors are oil&gas and energy sectors. Croatia produces more gas than it uses and finds itself on important route of gas pipelines. INA (an oil company) remains in hands of Hungarian MOL, from which Zagreb expect more than just making a profit. Plenković explicitly stated that MOL, as the “strategic partner of Croatian government in INA”  should consider investments instead of looking for short term benefits. This, in practical terms, means keeping Sisak refinery open and working. The facility at the moment does not bring profit, yet is an important employer in the poor region of Croatia. HEP Group (an energy company) on the other hand has already begun expansion abroad in such countries as Slovenia, and is holder of a number of subordinated companies in a widely understood energy sector. If the government and the companies will be able to create a sort of symbiosis between public and private sector which will remunerate Croatian economy and society, they will present a new model of state governance in the region.

Tax reform

One of the expected tax reform goals is to stimulate economy. As a result of the Yugoslav socio-economic system, mass emigration of Croats to the Western Europe and the sudden, ill-decay of the Yugoslav economy led to very high rate of unused property. According to the former Minister of Finance, Slavko Linić, half of the arable land is left uncultivated. Many of the estates in such a good locations as center of Zagreb remain uninhabited. Linić suggests that the estate-related tax would have two functions. Firstly, it would cover part of the expenses arising from the obligatory health insurance which so far is included in costs of labor. Secondly, is to stimulate economy and increase employment by “mobilizing” estates into some functions, i.e. force owners to use their estates and land. Surely, the government will need to find a way of filling the budget without however scaring away potential investors and antagonizing voters. Difficult task, but not impossible one.

International perception

Doing business in Croatia is not easy job. Recent Doing Business Report by the World Bank puts Croatia in 47^th  position. According to the document, the country: “made starting a business more difficult by increasing notary fees and made paying taxes more complicated by introducing a radio and television fee, and eliminating the reduction of the Chamber of Economy fee for new companies”. On the other hand however “Croatia strengthened minority investor protections by requiring detailed internal disclosure of conflicts of interest by directors”. The report does not mentions several obstacles mentioned unofficially by diplomats and foreign entrepreneurs which undermine FDIs efforts. Taken into consideration also relatively high level of nepotism and decreasing but still high level of corruption, the new Croatian leader faces difficult and rocky path to improvement. If he fails, he’ll surely sing a song of European integration and the Muppet show will go on.

Croatia's Prime Minister Andrej Plenković (European Parliament, CC BY-NC-ND)

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