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"Nor is free enterprise capitalism a free-for-all. This is not always fully understood in countries which are trying to make the difficult transition from socialism to capitalism. A properly functioning market economy must always be governed by clear rules of competition and there must be effective safeguards for investors. Capitalism cannot, in fact, operate without a strong administration to police the laws that provide its framework. And it cannot succeed without honesty. Racketeers, blackmarketeers and smugglers are not entrepreneurs - they are just plain criminals.  Corruption and gangsterism are scourges which afflict many newly developing economies and states. They should be ruthlessly and fearlessly expunged. Otherwise not just the free market but freedom itself is in peril. " Lady Thatcher, Speech Delivered in Zagreb, Croatia, Sept. 16, 1998

Rise and Fall of Prime Minister Ivo Sanader

February 19, 2010

By Boris Divjak, Senior Fellow, Adriatic Institute for Public Policy and Member of Board of Directors of Transparency International, Berlin, Germany

Having been formally appointed the Prime Minister of Croatia on 23 December 2003, Dr. Ivo Sanader succeeded late Ivica Racan at the moment when the previous government was losing pace and struggled to maintain internal cohesion, which led the ruling six-party coalition into avoiding most painstaking reformist decisions.

After only three years, which did bring about democracy and thus a ray of hope in the young Republic of Croatia, long governed by the authoritarian and criminalised regime of President Tudjman, the first democratic government however failed to achieve any deep-rooted reforms that would ensure their successful holding on to power.

The first next election opportunity thus brought an apparently reformed Croatian Democratic Union (HDZ) under the new leadership of Sanader back to power. The early days of Sanader seemed promising, with a much smaller, firm ruling coalition and a wide popular support that called for commencement of serious political and economic reforms, EU accession and market liberalisation.

In October 2005, following the formal start of EU accession negotiations, opinion polls showed Sanader to be the most popular Croatian politician. Most importantly the promise of further fiscal and market reforms led to further FDI inflow and increased GDP.

The growth figures over time however failed to exceed those of the Racan government and its composition hardly favoured greenfield investment, export-oriented industries, manufacturing sector, or non-banking privatisation, which would lead to an improved trade balance and lower foreign debt.

Chart 1: Cumulated FDI equity and reinvestment inflow into new and old firms by activity, 2003-2005, %, source Gábor Hunya, Evaluating the impact of FDI in SEE, the Vienna Institute for International Economic Studies, Vienna, 2006


Therefore the current account continued to expand to the existing -9.8% of GDP, while the total external debt stock reached 88.5% of GDP, i.e. over 40 billion Euros. None of these macroeconomic features were as worrying as the continuing rise of corruption and state capture, for which increasingly so evidence was pointing to the direct involvement of the ruling elites.

The budget deficit kept growing to finance shady procurement, privatisation deals, subsidies to the unsustainable state-owned enterprises etc. as well as supporting the minimum social stability endangered by the failed economic restructuring. As a matter of fact, the political establishment led by Ivo Sanader seemed to prefer maintaining such fragile economy, based on trade growth and financial sector takeovers, in which the government maintained control of the traditional manufacturing sectors, through hefty subsidies and procurement of goods and services run within the close crony circles.

The political stability was meanwhile maintained by perception of the persistent external threat: the 1990s war time foe Serbia was replaced with the alleged Slovenian threat to the Croatian integrity and EU accession. Sanader learned well from his late mentor President Tudjman: only an external threat maintains national cohesion and his uninterrupted rule, whereby the electorate does not question dangerous economic policies, as a concession for perceived preservation of security balance and national safety.

A score of nepotism and laundry operations was disclosed within the state-governed economy: from completely non-transparent procurement of military equipment, to controlled privatisation of the food giant Podravka, obscure procurement in the public road construction and maintenance enterprise HAC, as well as private gains in bank privatisations, such as Hypo, or by crediting of crony firms through the Post Bank HPB etc. to name only some.

Scandals ranged from deep-rooted corruption at universities and health sector to police and just about the entire public sector. Judiciary and prosecution, i.e. law enforcement agencies were not immune either, thus failing to prosecute any serious criminal activity.

Transparency International (TI) through its annual Corruption Perception Index (CPI) accurately documents this failure to establish the rule of law and efficiently fight corruption in this once most promising and a leading ex-Yugoslav republic.


Chart 2: Corruption Perception Index of Transparency International – marks and ranks of Croatia 2003-2009, Transparency International, Berlin, 2009 (synthesised by the author)

Chart 2 demonstrates that the early years of PM Sanader were marked by the public scepticism towards launching any meaningful anti-corruption reforms in Croatia, which gradually and eventually did gain a degree of trust, leading to an improvement in the Croatian ranking at the CPI of TI.

However, the later years clearly indicate a falling public confidence and a disappointment in the Sanader government that was increasingly displaying affairs, rather than a change. In his final year, ahead of the July 2009 resignation as Croatian PM, the country was sliding to the group of economies marked by a widespread corruption and state capture, with Croatia sharing the 66-68 position with Georgia and Kuwait.

Some other transition economies comparable to Croatia were leading the way and rising in the index, e.g. Turkey (61), Czech Rep (52), or Slovenia (27), while others such as Montenegro (69), or Macedonia (71) were rapidly catching up.

The results of these failures, or rather intentional devastation of the Croatian economy, were lowered FDI, collapse of the Zagreb stock exchange beyond the global crisis shock, a massive fall of GDP to its current -5.1% year-on-year and very visibly worsening economic conditions, with the re-emerging poverty in many parts of the country. But worst of all, the criminal elites established themselves very firmly in power, effectively controlling the executive, influencing the law enforcement agencies, all coupled with increasing occurrences of terror, unresolved murders, kidnapping and strengthened links to other Balkan mafia facilitating further smuggling of drugs, excise goods (e.g. cigarettes), human trafficking etc.

Despite fierce fighting and complete cut-offs in economic collaboration for almost two decades, the underground collaboration and the smuggling routes kept intensifying, however subject to control of the selected few in all the ex-Yugoslav republics that in no place were separated from high level politics.

The assassinations of the Serbian PM Djindjic in 2003 and Croatian leading journalist Ivo Pukanic in late 2008, both attempting to interfere or disclose such regional partnerships and massive-scale profit making, succeeded only in demonstrating that the war-time elites successfully accomplished their transformation into a unified regional mafia system, completely liberated of any national, religious or ethnic differences, in stark contrast to the official policies and nationalist manipulation of the public within each community individually. In 2009, the accession to the European Union seemed further than ever for Croatia, with a score of external enemies being blamed by the Sanader regime, while the depletion of the public resources continued uninterrupted.

Speculations continue as to what led Ivo Sanader to hand over the government to his successor Jadranka Kosor in July 2009. One thing is now certain – he never expected that his own party would launch a series of investigations and audits, with most of the leads pointing in a single direction – towards himself. The government appears determined to succeed in re-establishing the rule of law and upholding the European judiciary and law enforcement standards, irrespective of the individual casualties. Most investigations are at an early stage at the time of writing and the directly implicated individuals are being investigated.

The mafia structure as yet remains untouched, but seriously threatened. A real test of integrity for the key public agencies will be to carry on these investigations and follow such leads, prosecuting all those found in serious legal violations, scandalous theft and related economic crime. The public will honour any such restoration of institutional integrity, but for this prosecution of minor actors – mafia middle management – will not suffice. The public expects serious legal actions and only that will ensure a wide public support to the new leadership and the independent institutions. Purging the police and judiciary, ministries and public sector of all the cronies, who were directly accountable to their criminal networks can by no means be an easy or a quick task, but remains the only viable solution for the current executive and PM Kosor.

The public has demonstrated a swift support for the apparent readiness to launch such processes and not to stop short even if Sanader’s freedom is at stake. This is coupled with a broad international support and the prospects of EU membership. Yet there are very few other allies nationally or indeed regionally that will stay aside silently watching this network being dismantled. Evading the Sanader trial is the key to their uninterrupted operations and to Kosor’s political death.

By Boris Divjak, Senior Fellow, Adriatic Institute for Public Policy and Member of Board of Directors of Transparency International, Berlin, Germany

[1] Business Monitor International: Emerging Europe Monitor, South East Europe – January 2010: Croatia, p.8

[2] BMI, ibid.