CROATIA'S ECONOMY - "MOSTLY UNFREE", RANKED 113th OUT OF 157 NATIONS AND REMAINS AT THE BOTTOM OF EUROPE - 14Th ANNUAL INDEX OF ECONOMIC FREEDOM SHOWS, PUBLISHED BY THE WALL STREET JOURNAL AND THE HERITAGE FOUNDATION
Text in Croatian:
Index ekonomske slobode 2008 - prezentacija Hrvatske
Index ekonomske slobode 2008 - Objava za medije
Detalji Indexa ekonomske slobode za Bosnu i Hercegovinu
Information in English:
The Heritage Foundation and The Wall Street Journal's 2008 Index of Economic Freedom
Bosnia and Herzegovina's details
CROATIA'S ECONOMY - "MOSTLY UNFREE", RANKED 113th OUT OF 157 NATIONS AND REMAINS AT THE BOTTOM OF EUROPE
14Th ANNUAL INDEX OF ECONOMIC FREEDOM SHOWS - PUBLISHED BY THE WALL STREET JOURNAL AND THE HERITAGE FOUNDATION
Croatia "Repressed" in the Areas of Government Size, Property Rights and Corruption
Europe Regional Ranking: 37th out of 41
The Adriatic Institute in partnership with The Heritage Foundation released the 2008 Index of Economic Freedom published by The Wall Street Journal and The Heritage Foundation at a press conference on Tuesday, January 15, 2008 at the Sheraton Zagreb Hotel, Croatia. The Adriatic Institute released pertinent details of the 2008 Index for Bosnia-Herzegovina, Croatia and Slovenia. The following review provides a brief synopsis of Croatia's pertinent details.
This year's edition of the Index continues the substance and style of the 2007 edition with a renewed emphasis on a more scientific and objective methodology coupled with an accessible format. There are few dramatic changes in the 2008 Index, but there are a number of important refinements.
The countries are rated on a scale in which 100 represents the ideal. The Index measures economic freedom within 10 specific categories: labor freedom, business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights and freedom from corruption. Scores in these categories are averaged to create an overall score.
The 2008 Index revealed that only seven of the 157 countries graded scored 80 or higher, making them "free" economies; 23 countries earned 70-79.9 points and are characterized as "mostly free" economies; 51 of the countries surveyed are "moderately free" (with scores between 60 and 69.9) and 52 are "mostly unfree" (scores from 50 to 59.9). The economically "repressed"countries - the remaining 24 countries - up from 20 last year - scores below 50.
In January 2007, the Index announced Croatia's world ranking at 109 and was later revised to reflect Index revisions which then ranked Croatia at 128 out of 157 nations. The 2008 Index ranks Croatia at 113 out of 157 nations and 37 out 41- at the bottom of Europe's regional rank.
World Rank: 113 out of 157
Regional Rank: 37 of 41
Economy Category: Mostly Unfree
In its introduction describing Croatia's details, the 2008 Index says, "Croatia's most glaring weakness in terms of economic freedom is its outsized government. This shows up in other areas, notably heavy regulations on business, labor, and even rights to property. The court system is prone to corruption, political interference, and inefficient bureaucracy, and some investors prefer international arbitration. Significant unofficial restrictions on foreign investment, such as highly politicized decision-making, exist for investors willing to brave the regulatory maze."
During the news conference in Zagreb, the Adriatic Institute's Founder and President, Natasha Srdoc focused on Croatia's freedom scores and areas defined as "repressive", which includes "freedom from government" with the lowest rate for Croatia at 28%, a dismal 30% for "property rights/independent judiciary" and a low 34% for "freedom from corruption".
Croatia scored slightly better than the Index average in trade freedom at 87.6% and monetary freedom at 78.8% - an effort that begin with a few free market proponents implementing reforms in the mid-1990's. However, fiscal freedom slipped this year to 68.8%.
Interestingly, the issues that have been highlighted as "repressive" in Croatia have also come under greater scrutiny by the European Union bodies, members of the European Parliament and elected representatives of NATO's member states, and include the rule of law/protection of property rights, government/public administration reform and combating corruption. These fundamental issues are pre-requisites to joining the Euro-Atlantic institutions.
Furthermore, international and local media have reported that corruption at the highest level of government remains uninvestigated. The EU's annual report accurately describes Croatia's challenges by stating, "[t]he concept of conflict of interest is little understood" and "implementation of the anti-corruption program lacks strong coordination and efficient non-partisan monitoring."
The EU report also states, "[C]orruption remains widespread. There is a need for greater efforts to prevent, detect and prosecute corruption. No indictment or verdict has been issued in any high-level corruption case. The concept of conflict of interest is little understood. Implementation of the anti-corruption program lacks strong coordination and efficient non-partisan monitoring."
Looking at their track record, the prospect of Croatia's newly formed coalition government implementing vital policy reforms during the next term - does not look promising for Croatia's citizens and taxpayers. Over the past four years, the Croatian Democratic Union (HDZ) led government resisted market reforms and neglected its key responsibility in strengthening the rule of law. The failing grade for the HDZ government is highlighted by the fact -that not one major economic reform initiative was implemented, let alone, a concerted effort in reforming the judiciary. Moreover, in the midst of the economic challenges and judicial troubles, Croatia's administration has been tainted by numerous allegations of corruption - all of which have been publicly reported through a handful of media communications groups in Croatia.
Recent economic reports including the IMF working paper titled Economic Growth in Croatia: Potential and Constraints, co-authored by David Moore and Athanasios Vamvakidis have also warned Croatia's elected representatives and policymakers regarding the glaring domestic economic challenges which must be addressed urgently.
The 2008 Index of Economic Freedom: Croatia's "Repressed" Categories Under the Spotlight
Freedom from Government - 28%
Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 49 percent of GDP. Government spending and wage bills and subsidies have contributed significantly to an increase in overall indebtedness that has reached over 80 percent of GDP in recent years. Privatization has progressed slowly.
Property Rights - 30%
Observers view the judicial system as most affected by corruption. The court system is cumbersome and inefficient, and long case backlogs cause business disputes to drag on for years. Some investors insist that contract arbitration take place outside of Croatia. The government is committed to judicial reform, but much remains to be done. Croatia has intellectual property rights legislation but fails to protect IPR fully.
Freedom from Corruption - 34%
Corruption is perceived as significant. Croatia ranks 69th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. The government has initiated a process to overhaul the principal sources of corruption: the judicial system, the health system, local governments, political party financing, public administration, and economic agencies.
Other freedom areas that deserve greater attention in the "mostly unfree" category:
Investment Freedom - 50%
Foreigners may invest in nearly every sector of the economy, but because of a complex bureaucracy, very slow and opaque legal system, and subsidies to state-owned enterprises, personal and political loyalty can trump economic merit in establishing a competitive investment. Residents and non-residents may hold foreign exchange accounts, but there are numerous limitations, and government approval is required in certain instances. Though government expropriation for public purposes is legal, it has not occurred since Croatia became independent. The privatization fund has stakes in 1,012 companies, which are slowly being sold. Some capital transactions, such as inward portfolio investment, are subject to government conditions.
Labor Freedom - 50.5%
Croatia's labor market remains inflexible due to burdensome employment regulations that limit employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly. The labor code mandates retraining or replacement before firing a worker. The cost of laying off a worker creates a risk aversion for companies that would otherwise hire more people and grow.
Comments from The Adriatic Institute for Public Policy:
"Croatia's dismal results and being ranked at the bottom of Europe is not going to attract investments that will create new jobs. Croatia's elected representatives have a responsibility to seriously review the Index findings and introduce pro-growth policies and not superficial changes. Croatia ought to improve its score on the Index of Economic Freedom that will benefit its citizens and taxpayers. Economic freedom is being demanded by citizens that cast their votes to support change in Croatia's direction from its corrupt past and economic malaise. Dr. Milton Friedman boldly mentioned that economic freedom is a precondition to political freedom."
Natasha Srdoc, Co-founder and President of Adriatic Institute for Public Policy
"The timing of the Index is relevant indeed as Croatia's newly formed coalition government must begin its promised work of reforms for the next term. The Index shows democracy deficiencies in many areas such as being listed in repressed categories with size of government, protection of property rights and freedom from corruption. Foreign investors and capital are attracted to nations where the rule of law is upheld, property rights are protected, an independent judiciary fulfills its responsibility and where the business environment is conducive with low taxes, flexible labor market and a limited government. Principled and pro-growth solutions are required to turn the nation around from its democracy deficiencies and lack of functioning free market economy. Most importantly, Croatia needs a honest, accountable and transparent administration to implement reforms. "
Joel Anand Samy, Co-founder of Adriatic Institute for Public Policy
Comment from Dr. Daniel Mitchell, Senior Fellow, Cato Institute, Washington, DC:
"A number of reports and economic studies on Croatia clearly reveal problem areas such as the size of the government, over 50% as percentage of GDP - which directly contributes to the increased corruption and stifles economic growth; lack of property rights and high tax rates and a complicated tax system that discourages work, savings and investment. With regional tax competition intensifying in the Balkans with flat tax rates as low as 10%, Croatia should seriously consider introducing a low flat tax rate."
The Index states, " Egypt takes the prize for most-improved economy. A 2007 score of 55.1 earned it a worldwide ranking of 106th place, but its score in the latest Index - 59.2, an upgrade fueled in part by improving the business environment and implementing tax reforms - helped it climb to the 85th slot. Guyana, meanwhile, posted the biggest drop. High government spending and widespread corruption, among other factors, knocked five points off last year's score and brought it from 118th worldwide in the 2007 Index to 136th this year."
The 2008 Index underscores the central message of past Indexes: Economic freedom is strongly related to good economic performance. "The world's freest economies have twice the average per capita income of the second quintile of countries and over five times the average income of the fifth quintile," they write. They also have lower rates of unemployment and lower inflation.
The Index was edited by Kim Holmes, Heritage's vice president for foreign affairs, Edwin Feulner, Heritage's president, and Mary Anastasia O'Grady, who is a member of the Journal's editorial board and edits the "Americas" column. Copies of the 2008 Index (410 pp., $24.95) can be ordered at heritage.org/index
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