May 18, 2012
Fresh Data Confirms Croatia’s Failed Economic Policies
Call for Independent Investigations Focusing on Croatia's President Ivo Josipović and Prosecutor Mladen Bajić
The revised trade data for 2011 shows Croatia’s GDP declining for the third consecutive year whereby the original 0.2% growth for 2011 was revised to 0%, following the drastic 6% drop in 2009 and 1.2% economic decline in 2010. Croatia is the only post-communist eastern European nation to remain in a prolonged recession.
Croatia’s high unemployment rate of 20% (including the 45% youth unemployment rate) and uncertainties in the labor market contributed to deteriorating retail sales while the industrial output was down by 7.9% in March, year-on-year. Croatia’s weak domestic demand and lack of competitiveness of the country’s industrial output are major contributing factors to the negative trend of falling industrial output which continued into 2012.
Foreign Direct Investments at an All Time Low
Croatia's FDI amounting to €1.05b in 2011 is not encouraging. When reviewing the last 13 years in terms of FDI, the year 2011 was one of the three worst years in attracting foreign investments. The competition for attracting foreign capital has intensified in the Balkans with Serbia attracting nearly €2 billion in FDI. Serbia has successfully attracted companies including Belgium-based retailer Delhaize, Germany's electronic company Bosch, Italy's Benneton and Fiat, and the US' Cooper Tires.
Economists and organizations following economic data are forecasting a 1% decline for Croatia in 2012. However, Croatia’s government presented budget projections based on 0.8% growth. Paper bears anything - especially if it is justified by not losing the “precious” credit rating of just above junk level and raising much needed funding for excessive government spending.
Highest Tax Rates in the Balkan Region
Croatia’s government increased the already high 23% Value Added Tax (VAT) to a punitive 25% rate, making it among the highest in Europe and the highest rate in the Balkan region. Croatia’s corporate tax rate of 20% and its top marginal personal income tax rate of 40% is one of the highest in Eastern Europe.
According to the KPMG’s 2010 Individual Income Tax and Social Security Survey which covered 86 countries, Croatia has the highest combined contribution rate in the world, of 53.3% (in terms of income tax and social contribution rates for employees with an income of US $100,000.
EU Monitoring Report Raises Concerns on Croatia Conflicts of Interests Rules
The recent EC’s Monitoring Report on Croatia’s Accession Preparations relays serious concerns regarding the new government’s conflict of interest rules; specifically pertaining to supervisory and management boards of public companies. Through appointing their comrades to the boards of the public companies, the current government’s officials are perpetuating Croatia’s vicious cycle of political corruption.
Two Main Issues Require Greater Scrutiny
The following two issues must be addressed by those monitoring Croatia’s EU accession:
1. Mladen Bajic - Allegations of War Crimes Involvement and Cover-Up
The murky past of Croatia’s main prosecutor Mladen Bajic with his alleged involvement in war crimes and cover-up in the early 1990s makes him susceptible to significant political influence. As long as serious allegations of Mr. Bajic’s involvement in war crimes are not resolved, he can not perform the role of Croatia’s main prosecutor with the powers to initiate or stop any investigation or trial.
2. Conflict of Interest Case Involving Croatia’s President Ivo Josipovic
The recent revelation in Croatia’s corrupt-ridden government structures places Croatian President Ivo Josipovic in the midst of scandal which allowed his close friend to reap millions of euros through Mr. Josipovic’s direct legislative work. This abuse of public power for a private benefit has to be investigated. The trust of Croatia’s electorate has hit a new low, keeping in mind that Mr. Josipovic had waged an anti-corruption political campaign in 2009. The EU should insist on an official inquiry in this case as a part of the “monitoring process” of Brussels as local authorities are politically influenced.
Rampant Election Fraud Admitted by Minister of Administration
The Adriatic Institute had led the way in reporting on Croatia’s glaring democratic deficiencies, specifically, related to the December 4, 2011 parliamentary elections. For a nation of 4.3 million people, there were 4.1 voters on the voter list. The estimate of 917,000 illegal votes could have determined 70 seats in the 151-seat parliamentary assembly.
This major deficiency in Croatia’s deeply flawed democracy was confirmed when Croatia’s Minister of Administration, Mr. Arsen Bauk, admitted on May 10, 2012 that the voter list used in Croatia’s parliamentary elections in December 2011 had 1 million surplus voters. According to the estimate reported by The Adriatic Institute, 917,000 illegal votes could have determined 70 seats in the 151-seat parliamentary assembly.
Call for Robust Monitoring as Backsliding Appears in Croatia
Croatia’s “EU monitoring process” as required by EU member states, the European Parliament and the Commission must be robust in order to hold Zagreb’s politicians to account in addressing the issues of Croatia’s rampant corruption, politically influenced courts and unreformed police and intelligence structures.
The recent soft report does great injustice for both EU member state taxpayers and Croatia’s citizens investing in reforms without results. It appears that the lessons of Bulgaria and Romania have not been learnt as the EU continues to laud praise for superficial changes and ignores Croatia's stalled economic and judicial reforms.
The EU’s measures affirms a two-tiered Europe; one which upholds the law and the other which subverts the rule of law and tramples on the protection of property rights.
Brief report prepared by:
Natasha Srdoc, MBA
Chairman, Adriatic Institute for Public Policy
The Parlous State of Croatia’s Economy
The 10 Most Glaring Problems Facing Croatia
March 25, 2012
The adverse effects of socialism, rampant corruption and the weak rule of law in Croatia through the direct involvement of tarnished political groups HDZ and SDP/HNS/HDSSB, ex-communists and their cronies.
1. Value Added Tax of 25% and the highest marginal tax in the region will lead to a drastic drop in revenues and rise in tax avoidance and tax evasion. Croatia's tax policies and high tax rates have dealt a heavy blow to free enterprise and ushered in disincentives to savings, working and investments. Croatia can no longer compete with low flat tax leaders in the region attracting jobs and investments.
2. Croatia's unemployment Rate above 20% and youth unemployment rate (WB) at 45%.
3. Highest Brain Drain Rate in Europe +44% (WB).
4. Since 1991, over 1,000,000 citizens have left Croatia for economically free nations and the 2011 census report shows a drastic drop.
5. Rampant corruption and emboldened organized crime networks have led to a flourishing Balkan Route which brings into Europe drugs, weapons and illegally trafficked humans - mostly women and young children.
6. Politically influenced courts: Over 1 million back-logged cases, some for over 20 years.
7. Media captured by the state, crime and corrupt networks.
8. Over 50% in Government Expenditures as a percentage of GDP.
9. Over 917,000 illegal votes supplanted in the 2011 parliamentary elections - potentially determining over 70 seats in the 151 seat parliamentary. Croatia's "democracy is suspect" as stated in a recent BBC report.
10. The Economy: Over 60% in government debt, more than 100% in foreign debt, 3 years of recession and 6% budget deficit.
The State of Economy
Nataša Srdoč, Co-Founder and Chairman, Adriatic Institute for Public Policy - Adriatic institut za javnu politiku, Rijeka, Croatia
August 14, 2011
Croatia's Third Year of Economic Malaise -
While Neighboring Nations Grow
By Nataša Srdoč, Co-Founder and Chairman, Adriatic Institute for Public Policy - Adriatic institut za javnu politiku, Rijeka, Croatia and President, Hrvatska 21. stoljeća - Croatia 21st Century (H21)
Croatia's real GDP fell by 5.8% in 2009, 1.25% in 2010 and by 0.8% in the first quarter of 2011. The unemployment rate peaked in February 2011 at 19.6%. Since then, the unemployment rate fell mostly due to seasonal employment in tourism.
The European Bank for Reconstruction and Development (EBRD) revised downwards its economic growth estimate for Croatia in 2011 from 1.4% to 1.1%. The International Monetary Fund and The Economist Group’s business and economic research group - The Economist Intelligence Unit (EIU) have projected a 1% growth for Croatia in 2011.
The expected 1% growth in 2011 can be attributed to the anticipated tourist season.
Among the EBRD’s 29 recipient countries, Croatia is the only country that is yet to show convincing signs of recovery. While Croatia’s economy has been falling, a number of transitional countries are moving forward by implementing economic reforms and achieving their pre-crisis GDP levels.
Placing Croatia in perspective to the recent grim economic news affecting the United States:
S&P downgraded the credit rating of the US from AAA to AA+. Croatia’s credit rating was downgraded to BBB- at the end of 2010, which is on the verge of junk. However, this did not preclude Croatia’s government to issue a ten-year Eurobond (2.5% of GDP) on the US financial market with a 340 bps (3.4%) spread over the US Treasury benchmark in March.
Croatia does not have a debt ceiling and there are no intentions to balance the budget through reducing government spending and implementing structural reforms.
If anything, Croatia’s government has demonstrated how to raise taxes and become the world’s number one in taxation with the highest taxed personal income in the world. According to the KPMG’s 2010 Individual Income Tax and Social Security Survey which covered 86 countries, Croatia has the highest combined contribution rate in the world, of 53.3% (in terms of income tax and social contribution rates) for employees with an income of US $100,000.
Croatia has among the highest Value Added Tax (23%) in Europe. It does not make it appealing for FDI and ex-pats to choose Croatia as a beachhead for the region and beyond.
As a matter of fact, Croatia’s FDI in 2010 fell under the post-war level of 1996.
Croatia’s external debt surpassed 103% of GDP. Croatia’s public debt has reached 60% of GDP and Croatia’s government continues to operate with growing budget deficit which will have reached 6% of GDP in 2011.
With Croatia's current policies and political structures, new debts and new taxes are inevitable.
It is time to change Croatia's course of direction by choosing fiscally responsible and principled leaders who will confront widespread corruption, prudently reduce government expenditures and apply pro-growth solutions.
Croatia’s increasing unemployment rate nearing 19%, high debt and the political elite’s excessive inertia point to an economic collapse
By Natasha Srdoc, Co-Founder and Chairman, Adriatic Institute for Public Policy - Adriatic institut za javnu politiku, Rijeka, Croatia
February 13, 2011
Croatia’s extraordinary natural resources including its pristine coastal region, foods and wines and vast array of islands in the Adriatic continue to attract tourists from around the world. However, Croatia’s tourism industry, a major source of the nation’s budget revenue has allowed Croatia’s cabinet members, parliamentarians and an entrenched bureaucracy to exhibit excessive inertia. They have used tourism as an economic crutch.
Croatia’s lethargic political elite typically awaits its hard working citizens and diaspora and foreigners to flock to its tourist havens and increase spending which gives the nation much needed temporary boost in seasonal employment and economic growth.
Croatia’s GDP increased by 0.15% in the third quarter of 2010 which can be directly attributed to the increased personal consumption during Croatia’s tourist season.
This growth came after Croatia’s drastic economic decline of 5.8% in 2009 and 2.5% drop in the first and second quarter of 2010 respectively.
Just as tourist season ended, the unemployment rate started increasing and reached 18.8% in December 2010 - the highest level in five years.
2010 will certainly end with a GDP drop that most forecast at 1.5%. The budget deficit is projected to surpass 6% of GDP this year, public sector debt including guarantees 55% of GDP and the foreign debt is hovering around 100% of GDP. It is unsustainable.
Standard & Poor’s lowered Croatia’s rating from BBB to BBB- with a negative outlook due to Croatia’s “deteriorated fiscal position and continuously weak external financing”. This investment grade is just one step above junk.
Citizens, stakeholders and the engaged diaspora ask themselves, “Is Croatia’s government aware of the fact that it needs to be engaged in pursuing economic reforms in order to achieve higher rates of economic growth and employment - regardless of tourism?”
As Croatia’s Prime Minister Kosor re-organized her cabinet during the end of December 2010 by dismissing Finance Minister Ivan Suker, Minister for Environmental Protection, Planning and Construction Marina Matulovic-Dropulic, Defense Minister Branko Vukelic and Minister of Culture Bozo Biskupic, Ms. Kosor explained her decision as bringing new forces in order to forge an economic recovery in 2011. However, through local investigative media reports, the dismissed ministers were alleged to have been mired in corruption.
Unfortunately, there are current cabinet ministers tainted by corruption who still remain in power and whose replacements were contemplated and rejected due to the electoral contribution brought through their respective regional areas.
The new ministers do not have a track record of advocating reforms and their contribution may be seen as just being loyal to the governing HDZ party. At this stage, the fight against corruption appears to be a cherry-picking strategy with the primary objective of solidifying Ms. Kosor’s position within HDZ and a secondary focus on completing negotiations with the EU in 2011.
Disappointingly, it is hard to expect any real structural and economic reforms from a government enamored by cosmetic changes. It is clear that HDZ’s main objective is to win the elections in 2011 on the wave of EU accession and remain in power for another lengthy mandate. Selling off opportunities for Croatians to grow grapes and extend the production of wine is just a collateral damage.
An already outstretched budget deficit can only widen further during a contentious election year. With economic growth (estimated at 1.4% of GDP in 2011) which is significantly lower than the debt servicing (estimated between 4% and 6% of GDP in 2011), Croatia’s irresponsible and spendthrift government is passing the nation’s huge debt and economic problems to the next generation.
Principled and pro-growth solutions including the full implementation of the rule of law, creation of an independent judiciary that combats widespread political corruption and firm protection of private property rights must be unleashed to avoid an economic collapse.