Croatia entered the European Union (EU) on July 1, 2013 as the 28th member state. The government has been striving to raise Croatia’s competitiveness to compete in the large EU market and maximize the opportunities that membership brings, especially the absorption of a large amount of EU Structural Funds.
Before the global financial crisis of 2008-09, the Croatian economy grew at a healthy 4-5% annually, incomes doubled, and economic and social opportunities dramatically improved. The prolonged crisis put this progress, as well as Croatia’s aspirations, to the test, as the country struggled with six years of recession.
Return to growth of close to 1 percent is expected in 2015. The highest contribution to this growth comes from exports of goods and services. Declining oil and food prices and the personal income tax cut helped with the recovery of domestic demand, especially of personal consumption. Investment marked an annual increase for the first time after twelve quarters, driven by rising payments for projects financed from EU funds.
This modest recovery faces down side risks due to the volatile external environment and deepening fiscal vulnerabilities. A missed European Commission excessive deficit procedure target, rising indebtedness and slow corporate sector restructuring and ability to absorb EU funds could undermine investors’ perceptions. Progress in addressing inactivity and unemployment, the main cause of the recent rise in poverty, remains slow. Addressing fiscal vulnerability and existing social challenges requires faster implementation of structural reforms that would underpin private sector growth.
There are early signs of a labor market recovery with unemployment remaining at a high 17 percent. About 60 percent of the unemployed have been jobless for more than a year and the youth unemployment rate (ages 15-24) is above 40 percent.
Before the recession, relative poverty was below 10% and mainly affected those without a job for more than three years and low-skilled workers but the protracted recession has led to an increase, and the poverty rate now stands at around 19%. Today, due to the prolonged recession, the profile of the poor is changing, with normally economically active, better educated and younger people living in urban areas falling into poverty.
The Croatian economy is less competitive than its peers. From 2007 to 2013, Croatia’s private sector share of GDP remained at 70% - lower than its EU peers. To achieve private sector-led growth and faster EU convergence, actions are needed to liberalize the labor market, jump-start enterprise restructuring and the kind of new business creation and old firm exits required for the economy to reorient itself toward one reliant on knowledge, innovation, and transit-related services to maximize its geo-economic advantage as Europe’s transport hub.
Croatia spends 7.9% of it GDP on health, among the highest for new EU members. In a fiscally constrained environment, the Croatian health system faces a mismatch between declining available public resources, growing expenditures and increasing needs to ageing population and epidemiological changes in the country. A challenge is to provide better health services and improve efficiency while reducing public spending on health.
Croatia’s education system faces many challenges. The most important challenge is to improve the quality and relevance of education to respond better to labor market needs and reduce the skills gap. For example, the higher education sector would benefit more from a more performance-oriented approach, improved governance, organization and financing, increased completion rates and student mobility. Vocational education also needs attention, as there is currently a mismatch between the skills offered and labor market demand.
Croatia has the geopolitical advantage of being situated along three pan-European transport corridors linking the EU and South East Europe and the Croatian authorities have invested heavily in developing this transport network. Prior to its accession to the EU, Croatia launched major reforms for the railway sector, in compliance with EU directives and has recently started restructuring the three independent railway companies to improve their operational efficiency and financial sustainability. Croatia’s accession to the EU provides unique opportunities for the country to modernize its key international corridors through the use of EU Structural Funds, and to open up the railway sector to increased investment, market competitiveness, and efficiency.
Croatia remains an ecological treasure in Europe, with 47% of its land and 39% of its sea designated as specially protected areas and areas of conservation. Croatia boasts 19 National and Nature Parks, with some- such as the Plitvice Lakes National Park - designated as United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage sites. Croatia’s natural beauty draws in millions of tourists each year, with tourism revenues representing around 15% of the country’s GDP. Preservation of the environment is high on the development agenda with waste and water management still proving to be challenging.
With EU membership, Croatia became party to the 2020 Climate and Energy Package, a set of binding legislation that aims to ensure that the EU meets its ambitious climate and energy targets for 2020. While Croatia is doing well on most of the targets, it needs to put more effort into scaling-up renewable energy resource (RER) and energy-efficiency (EE) programs to alleviate energy security concerns and improve access to reliable and affordable energy imports.