SKOPJE, Macedonia, Dec. 17 (UPI) -- It was a normal week in Croatia. Generals were being indicted by The Hague, the new Yugoslav ambassador apologized for crimes committed against Croats by his compatriots, and Bosnian officials coped with a restive Croat population in their patchwork country.
The CIA comments on Croatia's Balkan geography delicately. Croatia, it says in its "World Factbook 2001,"...controls most land routes from Western Europe to (the) Aegean Sea and (the) Turkish Straits". With a population of 4.5 million and a landmass of about 56,500 sq. km., Croatia is more than twice as big as Slovenia. It is almost as ethnically homogeneous -- 78 percent are ethnic Croat and Catholic. The Croats are highly literate and skilled, the legacy of centuries of Austro-Hungarian (especially Habsburg) rule.
Croatia's (mostly industrial) output per capita was almost as high as Slovenia's in the former Yugoslavia (and a good one third higher than the Federal average). Yet, nowadays, Croatia trails Slovenia by every economic measure. Its GDP per capita is half the latter's. Why this discrepancy?
While Slovenia was always export and services oriented, Croatia languished under a bloated and venal industrial central planning bureaucracy. Four years of savage internecine fighting (avoided by Slovenia), almost a million internally displaced people, and the overnight transformation of close economic allies and target markets into mortal and bitter enemies -- all took their toll.
Croatia's transition from heavy and mineral industries into "lighter" tourism and oil processing, generated largely internally, with less Western aid than in other countries (the EU Phare program only included Croatia in 2000) was successfully completed earlier this year, following a mild recession in 1999-2000 --- the Kosovo conflict, which happening in spring killed the 1999 Croatian tourist season, didn't help. The economy grew by 3 percent last year as more than 70 percent of the labor force found work in services (compared to 30 percent in industry and agriculture combined).
Yet, the implosion of world travel and tourism following the Sept. 11 atrocities, threatens this newfangled economic foundation as well, albeit less than in other tourism destinations since most Croatian tourists arrives by road from Germany, Italy and Central Europe. Successive Croatian governments failed to tackle structural reforms decisively, the victims of fractious and contentious party politics and trade union extortion. Only recently has the wage bill of the central government been trimmed (by 5 percent) and social transfers rationalized -- though the full implementation of these measures has been put off, by an obstinate parliament, to 2002, after an earlier rationalization, that would have taken effect in 2000, was cancelled. The collective agreement with state and public workers signed earlier this month froze salaries -- and net employment -- at this year's levels. IMF style social engineering resulted in unrest and pet mutinies within the administration. Earlier this month, the director of the Croatian Health Insurance Institute blamed lack of drugs and a deteriorating health care service on cuts in health funds (and payment arrears, the result of a gigantic deficit).
Croatia's rating card is mixed at best. In 1993-97, the HDZ (Croatian Democratic Union, the party founded by the late president Franjo Tudjman) government of Nikica Valentic, with Bozo Prka as Finance Minister, carried through a remarkably successful stabilization program, bringing inflation down to 4-5 percent and the central budget deficit close to zero. Croatia's inflation rate, after a blip in 2000, has remained at 4-5 percent, and its GDP growth has recovered to 4 percent.
However, after a pre-election spending spree in 1999 and fiscal laxity by the new SDP (former Communist)-led Racan coalition government in 2000-2001, Croatia now has a serious fiscal deficit, not ameliorated by a sluggish pace of privatization, except in the financial sector. Croatia has resorted to persistent foreign borrowing to cover its payment arrears. In a Letter of Intent to the IMF dated October 31, 2001, Croatia undertook to slash its budget deficit to a still unsustainable 5.3 percent of GDP this year (and 4.25 percent next year), mostly by the socially expedient cutting of capital investment. In effect, Croatia has reneged on its earlier commitments to attain fiscal rectitude by reducing subsidies, wages, and transfers.
Nevertheless, the IMF, which like the World Bank, USAID and EU-Phare prefers the current government to its nationalist HDZ predecessor, professed itself to be content with Croatia's performance, commending it for exceeding targets agreed in its latest March 2001 standby arrangement. The World Bank has lately approved a Structural Adjustment Loan (SAL) of $202 million. Croatia is now one of the Bank's darlings, with $780 million committed and $550 million disbursed (mostly on transportation infrastructure, urban development, and finance-related projects).
Of Croatia's smallish labor force, 1.7 million strong, about 300,000 are unemployed. Of about 13,000 new jobs created in November, the majority were in state administration and the public sector. Moreover, Croatia is unique in that half of the unemployed are either skilled or highly skilled. One in twenty five of the unemployed has a university degree (compared to a world average of 3 percent for employed and unemployed together). Brain drain, though not as severe as in Macedonia or Yugoslavia, is still detrimental to Croatia's future.
Croatia's monetary position is better. The Croatian National Bank (CNB), a home of tight monetary policy since 1993, has come close to meeting its targets regarding foreign exchange reserves and net domestic assets and has pursued a vigorous banking reform program coupled with credit expansion to the fledgling private sector. Spreads on Croat eurobonds have narrowed despite widespread aversion towards emerging markets debt. Public trust in the economy is evidenced by robust growth in retail sales, business investment, and private consumption. Domestic banks are repatriating capital. The economy is being remonetized -- interest rates are lower, bank deposits in both domestic and foreign currencies higher, bank lending is surging, and the monetary base expanded. The CNB had to intervene repeatedly to prevent an appreciation of the kuna -- a highly unusual circumstance in countries in transition. The CNB may yet have to resort to contractionary policies next year should this tsunami of demand for money not abate. The current account deficit increased to about 3.5 percent of GDP -- the result of massive last minute privileged purchase of cars by war veterans. However, the deficit trend is a more sustainable 2-2.5 percent.
The introduction of the euro will stretch the resources of the banking system further, as the deutschemark is an unofficial second currency in Croatia. Erste Bank from Austria has shipped tones of euro coins and notes to Croatian banks last week alone. Since Croats hold most of their DM savings in cash, the exchange operation is likely to be drawn out and complicated. The EU, for fear of money laundering through euro conversions, has already demanded from Croat banks detailed reports on any cash transaction involving more than 14,000 euros.
Minor geopolitical irritants still mar the future: a dispute with Italy regarding war time property, with Slovenia regarding land and maritime borders, with Yugoslavia regarding a UN administered peninsula, with Bosnia regarding everything -- from port facilities to the composition of commissions common to both countries. Croatia is also an auxiliary drug smuggling route for both East Asian heroin and South American cocaine, which makes the EU vocally unhappy.
True, a third of Croatia's exports still go to the likes of Bosnia-Herzegovina, Slovenia, and Macedonia. But it has developed major new export markets in Germany, Italy, and Austria and has signed a Stabilization and Association Agreement with the EU on December. The trade related provisions would apply from January 1, 2002. Croatia has every intention of applying for EU accession as early as 2003. It cannot afford to allow any part of its economy or society to interact with the sleazier sides of the Balkans. It needs to extract itself from its geography -- and the sooner, the better.