End-of-year column by the World Bank Croatia Country Manager Elisabetta Capannelli on macroeconomic trends and Croatia’s economy in the upcoming period, originally published in the Poslovni Dnevnik on 29 November 2019.
You might ask, why children? What an unusual subject for the World Bank? Why not some dry topic like justice, doing business, the reform of public administration? And yes, I really mean those lovely little creatures that are the source of joy and smiles for us all, and who crowd our Christmas shopping list. Maybe because the success of a World Bank Country Manager’s tenure is, for some odd reason, often positively correlated with the number of kids your staff has during your stay in a country. And let me say that we are doing well in this regard and contributing to Croatia’s demographic renewal.
The economic situation in Croatia is not as bad as some might argue. The economy is growing at around 3 percent, the country’s fiscal position has greatly improved, and we see progress in critical areas, such as the business environment, usage of European Union (EU) funds, and in poverty data, just to mention a few. Yet, is this going to be enough for our kids? I don’t think so. Croatian citizens, and their children, want to be sure their abilities and efforts will propel towards a better future.
An indispensable development model
For this to happen, Croatia will need to grow faster and, equally important, this growth will need to be more inclusive and greener. After years of recession, growth rates of 3 percent are not enough to make me smile and will not be enough to bring the living standard of its citizens closer to those of more advanced countries in Europe. People hear me often repeating that at the current growth rate, Croatia will reach today’s living standard in the Czech Republic in more than a decade, or that of Austria in more than two decades. Croatia is on a diverging path with countries it used to compete with and compare itself to.
Croatia’s imperative today is to come up with a new development model that will allow her to grow faster, while delivering social justice and increasing people’s trust in state institutions. This requires a profound transformation, a real leap frogging, a new pact among citizens, policymakers, trade unions, civil society, and the corporate sector, who, collectively, will not be afraid to say – ‘yes, we are ready to take this country forward and do whatever is best for society as a whole. We are ready to break with the past. We are tired of compromises, of small steps, of excuses, of vested interests, of thinking about the past, of all those who just want to squeeze as much as possible out of the state today without thinking of our children’s future.’
I am well aware that this can sound naive and can be easily dismissed as unrealistic. One can say that the current composition of Croatian economy is weak, with its relatively small export sector and high import dependency. One can point to weak institutions, comparably poor outcomes of the education process, low investment in R&D, the large footprint of the state in the economy and the widespread presence of less efficient, state-owned enterprises. One could also say that many Croatian citizens are out of the labor force, the business environment is cumbersome, the government budget is tilted towards current expenditures, and the public sector is inefficient in providing services.
These are real challenges. Croatia has the smallest goods export sector among Central Eastern European (CEE) countries (only 23.6 percent of GDP compared to an average of almost 60 percent of GDP in CEE countries) and is over-reliant on tourism, where productivity gains are limited. It also has the highest tax burden on the economy among its peers (general government revenues in 2018 reached 46.6 percent of GDP compared to an average of 39 percent in CEE countries), and the proceeds are used to finance an oversized and inefficient public sector.
But we can also turn the story around and say that implementing change is not impossible and catching-up with the rest of the EU will require rather traditional and well-known types of structural reforms. And in Croatia there are numerous, positive examples of companies that are thriving, students who bring home gold medals from championships in mathematics, chemistry and robotics, scientists who are achieving world-class results and are recognized as leaders in their respective fields. In 2019, Croatia made its first formal step towards euro adoption, it has met all technical criteria to join Schengen, and it has moved up the Doing Business and Global Competitiveness lists, by 7 and 5 places respectively. Absorption of EU funds has improved significantly over the recent period (now at around 80 percent of contracted funds and around 30 percent paid to final users).
Challenges become opportunities
If we focus on the future, the challenges that I have mentioned suddenly can become opportunities that, if tackled, would unleash this country’s potential. This, however, requires a bold vision and a decisive action plan. Examples of countries that have truly turned around their country are abundant. The outward oriented and market friendly development of the Asian Tigers, Germany’s labor market reforms of 2000s, Finland’s long run focus on education, Latvia’s reform of the public sector, Estonia’s digitalization, and so on. But none came out of a step-by-step approach, and, while there is no one-size fits all model, in each of the examples above, the existence of a well-defined government vision was crucial.
Croatia is currently in a great position to set a new direction for its future. I cannot think of a better moment than now, when policy makers are getting ready to prepare the new National Development Strategy Croatia 2030 – basically the first such comprehensive document in Croatia’s history. But it will be crucial for this not to be just another exercise that will produce a good document that may later not be implemented. Instead, setting a clear direction, clear targets, clear reforms and investments, and a clear set of actions can help Croatia set itself on a new course. And we need a pact among all actors in society who will support such a vision and a desire to change.
Croatia is about to take over the Presidency of the Council of the EU and will demonstrate its ability to lead and bring to the table topics that will shape Europe’s future. The opportunity is great for Croatian leaders to also set the new direction for this country.
Today, and every day, let us wake up thinking of our children and our children’s children - to whom we will leave a beautiful Croatia that is not just remembered for what nature endowed it with, but for what it chose to become.