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CROATIA





In-depth Business Intelligence 

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 28,322 22,421 20,300 61
         
GNI per capita
 US $ 5,350 4,640 4,550 70
Ranking is given out of 208 nations - (data from the World Bank)

Books on Croatia



Update No: 118 - (29/03/07)

Zagreb rejects criticisms
Croatia has an awful lot going for it, a magnificent coastline and countryside, splendid old buildings and an excellent location as a natural gateway to the Balkans. But its reform course has stalled and its terrific potential is not materialising.

On the long and winding road of post-socialist economic transition, Croatia has often outpaced other countries in South East Europe. Yet now, just when it should be roaring ahead as a magnet for investment in the region, Croatia has reached a crossroads between rhetorical fantasy and economic reality.

Politicians in Zagreb have a habit of describing as a foregone conclusion the country's future within the European Union and Nato.

But critical observers cannot help noticing that, increasingly, the facts show a country that, in critically important ways, resists the reforms it needs to go all the way.

External variables such as the European Union's "enlargement fatigue" are a factor, but there is trouble within as well. Far more important to Croatian citizens are realities on the ground, and these, according to a series of highly influential international indexes and reports, including the EU's own annual Progress Report, are troubling.

Reforms in Croatia are starting to lag, and the country's leaders are loathe to admit it.

Still 'unfree' on most counts
The Heritage Foundation and The Wall Street Journal's recent Index of Economic Freedom rated Croatia 109th out of 157 countries worldwide - a pitiful 37th out of 41 nations in the region of Europe.

The index, which scores economic freedom according to an exacting set of objective criteria, described Croatia as 55 per cent economically free, calling it "mostly unfree."

In matters of property rights, rule of law, corruption and freedom from government, the index called Croatia "repressed."

Ratings for investment freedom, labour freedom, and business freedom were "mostly unfree." Financial freedom scored a bit better - "moderately free" - while trade freedom, monetary freedom and fiscal freedom were deemed "mostly free." 

The index's criticisms confirmed what other recent analyses from the World Bank, European Union and others also indicate. If Croatia truly intends to scrap its twin legacies of socialist and authoritarian rule, there is much work to do.

Faced with this flood of concern from genuine advocates of freedom and prosperity worldwide, one might expect elected policymakers in Zagreb to respond soberly, with fresh, sincere commitments to make life easier for businesses and families.

'Croatian spin doctors'
Instead, Croatia's government has thrown itself into advanced spin mode. Ivo Sanader, the prime minister, went on record rejecting the data published by The Heritage Foundation and The Wall Street Journal.

Likewise, his government pooh-poohed the results of the World Bank's 2006 Doing Business report, and spun the EU's annual Progress Report, prompting The Wall Street Journal to publish a rebuttal titled "Croatian spin doctors."

In February, when The Economist published an online report calling Croatia the "soggy bottom" of Europe, a place where "nobody wants to upset the murky and convenient status quo", the government quickly dismissed it as untrue.

This zeal for manipulating the facts only sets back the stated goal of a government whose ultimate policy focus is full membership of the Euro-Atlantic alliance. Indeed, it is reminiscent of how communists in Zagreb once fielded criticism.

This must stop. A lack of candour inhibits freedom - and freedom is what is at stake, most critically in the economic sphere. The reports from the EU and Heritage Foundation elaborate usefully on this point.

The threat to freedom does not end with the economy alone. It begins there. Milton Friedman, the Nobel Prize-winning free market economist who died late last year, called economic freedom a prerequisite for political freedom. He was right, and political leaders forget his teaching at their peril.

Croatia's leaders, however, have learned to insulate themselves institutionally from criticism. Sanader has invited the Croatian Chamber of Commerce and National Competitiveness Board to review and respond to the Index of Economic Freedom. It looks good, but in fact he can rely on these institutions to reject the index's findings.

Authoritarian and corrupt statism still in place
The Chamber of Commerce is still financed by the government, which mandates obligatory membership for every company operating in Croatia; the National Competitiveness Board, founded by USAID, meanwhile, consists of government officials, trade unions representatives and privileged representatives of business such as state-owned companies and large private firms holding state contracts.

By contrast, independent businessmen who speak publicly about corruption face the risk of open reprimand from figures of political authority including the prime minister himself. The effect is to discourage transparency and freedom of speech when Croatia's government needs private individuals, journalists and civic leaders to highlight areas requiring improvement. Independent voices are more likely to call a spade a spade.

Responding to the recent flood of criticism, the government boasts that Croatia receives "high ratings from all international institutions, such as the European Commission and International Monetary Fund".

In fact, the EU Progress Report issues a jarring verdict that Croatia has "no overall strategic framework" for reform.

It goes on to describe an environment ripe for corruption. Croatia lacks "clear and transparent rules and procedures with regard to elections and the forming of governments at the local level." The country remains "still some way from enjoying an independent, impartial, transparent and efficient judicial system," and "allegations of corruption remain uninvestigated and corrupt practices usually go unpunished." An additional European Commission report cites "major interference of politics with (the) judiciary."

In any such atmosphere, risks of corruption loom large.

And yet post-socialist reform need not be murky. Mart Laar, the former prime minister of Eastern Europe's star performer, Estonia, offers simple advice: "The first step in fighting corruption is not to be corrupt yourself." Are Croatia's leaders ready to heed it? To see Estonia's astounding rate of reform-driven economic growth, they should be.

Croatia appears to be unprepared to clean up its own affairs, and yet a cleanup is urgently needed, for the state retains an alarming share of overall economic activity. 

Government expenditure is worth 52 per cent of the country's gross domestic product, and yet, in some cases, it uses its position to crowd out private initiative. According to a report from the business news web portal business.hr, a substantial minority of public contracts, worth 146 million kuna (about 20 million euro), has been awarded without public tenders.

The consequent lack of room for private initiative and other hindrances to economic freedom need challenging, or they will only grow.

Croatia's Adriatic Institute for Public Policy last October co-hosted the Libertas Debate Series at the European Parliament with Roger Helmer, a British member of the European Parliament. There, issues of alleged corruption were raised in the cases of two former and two current government ministers.

In the wake of the meetings, the Adriatic Institute sent enquiries regarding the cases to Croatia's government, along with follow-up correspondence from Helmer. The enquiries went unanswered, in violation of Croatia's Freedom of Information Act. The unspoken message was one of contempt for the dignitaries present at the meetings, but more importantly for citizens and taxpayers.

Change of Western policy needed
It is time for the EU, World Bank, USAID and others who grant or loan substantial sums of money to Croatia to re-examine their approach. Too often, their funds contribute to systemic inertia when a change of course is needed. Croatia needs an approach more directly emphasising accountability and transparency.

Greater economic freedom should be a condition of future transfers of international support, with greatest emphasis on rule of law, protection of property rights, judicial reform and the complete, transparent privatisation of state-owned enterprises.

Such measures might rouse the government from its current state of denial, and eventually help Croatia to establish the foundations of a freer, more prosperous market economy.

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BANKING

Erste Bank posts a big profit growth for 2006


During 2006, Erste & Steiermarkische Bank Group recorded in Croatia a profit increase of 18.2 per cent compared to 2005. Bank assets amounted to 35.51 billion crowns at the end of year, which enabled the bank to acquire 11.8 per cent market share, "Croatia Today" reported on March 7th.
Client deposits amounted to 22.3 billion crowns and increased at the rate of 30.2 per cent during 2006, while the market increased at the rate of 18.1 per cent.
Net loans approved to clients reached 21.9 billion crowns, which is up by 19.1 per cent on 2005. During 2006 net income from interest reached 879 million crowns, while net revenues from fees and commissions totalled 217 million crowns, up by 25.1 per cent. Income from regular operations reached 1.27 billion crowns, which is up by 11.4 per cent on 1.14 billion crowns recorded in 2005.

HNB reports 311 billion crowns in banking system

In 2006, banks in Croatia made pre-tax profits amounting to 4.2 billion crowns, while housing loan banks recorded losses amounting to 60 million crowns, the Croatian National Bank (HNB) Council said, Hina News Agency reported on March 14th.
The Council considered the latest economic and monetary developments, the situation in the banking sector in the fourth quarter of last year and a report on the management of foreign exchange reserves in 2006, the central bank said in a statement. Thirty-three banks and five housing loan banks operated in the Croatian banking system in the last quarter of last year. Sixteen of those banks were in domestic private ownership, while two banks and one housing loan bank were in state ownership. Fifteen banks and four housing loan banks were in foreign ownership, accounting for 91 percent of the overall bank assets.

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FOREIGN BUSINESS

Kosovo companies are being looked at for business

Croatian Economy Minister, Branko Vukelic, headed a business delegation on a visit to Kosovo. An economic forum was to be held in Pristina with 80 managers from Croatia participating, "Croatia Today" reported on March 13th.
The total exchange of goods between Croatia and Kosovo is around 33.4 million Euro per year, with Croatia's exports covering 32.2 million Euro. The greatest Croatian exporters to Kosovo are TDR, Podravka, Saponia, Kvasac, Ina, Koncar, Pliva, Dukat, Kras, Ledo, Petrokov and Belupo. There are 15 Croatian companies in Kosovo, while 30 companies are present via dealers and distribution companies. Croatian companies' business is facilitated by the temporary agreement on free trade signed by the Croatian government and the UN Interim Administration Mission in Kosovo. In line with the agreement dated November 1, 2006, customs tariffs have been rescinded for industrial products, except for three groups of products from Croatia on which 60 per cent of customs tariffs are paid.

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FOREIGN RELATIONS

Croatia is Poland's most important regional partner

Polish Foreign Minister, Anna Fotyge, recently met with her Croatian counterpart Kolinda Grabar-Kitarovic and stressed that Varsava supports Croatia's entry into the European Union and NATO, Croatia Post reported.
"Croatia is Poland's most important partner in the region and Poland was willing to share with Croatia its experience from the process of accession to the EU," said Fotyge. 
Fotyge was on her first official visit to Croatia in the year in which the two countries were celebrating 15 years of diplomatic relations. During the meeting, the two ministers said that political and economic relations between Poland and Croatia was good and that there were no outstanding issues between them.
Both ministers agreed that they have room to improve their economic co-operation, and the subjects of global security and co-operation of the two countries in the context of NATO and the NATO-lead ISAF mission in Afghanistan. The economic cooperation between Croatia and Poland is growing. Trade increased 33 percent in the 2005-2006 period and the number of Polish tourists vacationing on the Croatian Adriatic coast rose 14 percent last year, Grabar-Kitarovic said. Croatia is interested in Poland's experience in the process of integration with the European Union, particularly in the use and implementation of EU pre-accession aid and in the use of cohesion and structural funds, she added. The Polish minister also met Parliament Speaker Vladimir Seks, and Croatian President Stjepan Mesic.

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FOREIGN TRADE

Trade between Croatia-Montenegro doubled

According to the preliminary information, in the first six months of 2006, the commodity exchange between Croatia and Montenegro doubled to 28.5 million Euro and 25 million Euro goes to Croatian exports to Montenegro.
This was announced at the Croatian-Montenegrin forum in the Croatian Chamber of Commerce, Mnnews reported. 
Around 33 companies from Croatian and Montenegro participate in the Forum, from tourism, energy industry, building, food industry and financial industry. It was reported that Croatia is the seventh biggest trade partner with Montenegro, and third biggest when it comes to the region.
While delivering the inaugural address at the forum, Croatia's Economy minister urged that the administrative obstacles which blocked big interests of Croatian and Montenegrin businessmen should be removed to create greater co-operation with joint moves. He added that co-operation was necessary for strengthening of mutual relations between the two countries. For his part, Montenegrin colleague Branimir Gvozdenovic said that their closer co-operation is necessary for strengthening of mutual ties. Gvozdenovic also added that in the last couple of years, a noticeable influx of foreign investment in Montenegro has been present, which strengthened their companies that are now interested to invest abroad and that includes Croatia as well.

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SHIPPING

Government to sell stake of "Viktor Lenac" shipyard

The Croatian government is going to sell its claims from the ailing shipyard "Viktor Lenac" to the Pula-based shipyard "Uljanik" and the Zadar-based "Tankerska Plovidba," a shipping company operating cargo vessels, it was reported on March 2nd, New Europe reported.
By selling its claims at the price of 10 million crowns, the government will put an end to its role in "the story of Lenac," Deputy Prime Minister, Damir Polancec, said. Tankerska Plovidba and Uljanik will take over state claims amounting to 326 million crowns, with the obligation to invest an additional 58 million crowns in the shipyard's capital stock, Polancec explained. Finance Ministry State Secretary, Ante Zigman, said that this move would enable the Rijeka-based company to continue operating, retaining all 650 workers on the payroll. In addition, Lenac will have commissioned jobs for at least five to 10 years. The two government officials added that trade unions of employees in the Lenac Company had supported the government's plan for the shipyard from the very start.  

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