CROATIA COUNTRY BRIEF 2004

Overview (© 2004 The World Bank Group, All Rights Reserved.)

Croatia is an upper middle-income country with a gross national income per person of US$5,350 in 2003. Approximately 70 percent of GDP is created in the services sector, with tourism generating the most income and employment. Of the remaining share, 20 percent is from manufacturing, and 10 percent from agriculture. Manufacturing is dominated by traditional export goods including shipping, clothing, and chemicals-all highly labor-intensive, low value-added products.

The country has made extensive progress in transforming its economy, achieving economic growth and moving toward joining the European Union. Since 2000, Croatia has been one of the fastest growing economies in Central Europe, with GDP growth averaging 4 percent. In addition, democratic institutions have been strengthened and the country has shed its inward orientation. It has joined the World Trade Organization, acceded to membership in the Central and European Free Trade Agreement, and successfully negotiated a Stabilization and Association Agreement with the European Commission. In February 2003, Croatia applied formally for European Union membership and, in June 2004, was granted candidacy status.

However, in spite of the country's recent economic growth, challenges remain. Although the unemployment rate has been falling since 2000, it still remains high-at about 14.3 percent in 2003 (ILO data)-due to lack of investment in the private sector. The creation of new jobs and businesses is hampered by stringent legislation that protects employment, and an education system that does not equip the labor force with competitive skills.

The restructuring of enterprises is hampered by inadequate property and creditor rights and a poorly functioning judiciary. Poverty is concentrated in some regions (especially war-affected areas) and among certain ethnic groups. About Croatia

Population: 4.5 million Population per sq km: 80

Population growth: -0.2%

Life expectancy (2002): 73.8 years

Population below national poverty line: 10%

GNI per capita (Atlas method): US$5,350

GDP: US$28.3 billion

GDP growth: 4.3%

2003 Data Sources: National statistical offices, ILO, IMF, IFS, WDI, WDI August 2004, and WB staff estimates

Developments since independence. Croatia became independent in 1991. In the first, often turbulent, decade after independence the country built the structures of a new state, created a new currency, repaired large-scale war damages, and initiated reforms for transition to a market economy. By 1997, the country was awarded an investment-grade rating.

However, in 1999, after five years of growth, recession set in. Tourism, a key source of foreign exchange, was affected by the Kosovo conflict and unemployment rose to over 15 percent. Public expenditure, at 56 percent of GDP, reached record levels. In the absence of reforms, foreign direct investment remained low, and the high current account deficit was financed by a large external debt.

Recent economic performance. Since 2000, the country has made significant progress in implementing structural reforms, though the pace of reform has been slow. Nearly two thirds of the economy has been privatized and around 90 percent of bank assets are now privately owned, mostly by strategic foreign investors. The banking system is well capitalized and profitable. Although GDP has grown since 2000, the sustainability of growth is not certain as it has been underpinned by rapid growth in domestic demand while net exports have deteriorated.



Challenges Ahead

Further reducing unemployment and raising living standards. Unemployment, at 14.3 percent, remains high. Moreover, some 10 percent of the population still lives below the poverty line. Reducing the fiscal and current account deficits. Despite significant progress in fiscal adjustment, the budget deficit remains high and needs to be reduced to more sustainable levels. The fiscal deficit of 4.8 percent of GDP in 2002 needs to be reduced to 2 to 3 percent in the coming years. Additionally, the current account deficit increased substantially in 2002 to 6.9 percent of GDP after a period of rapid credit growth which financed imports. Credit growth and the current account deficit also need to be reduced to more sustainable levels. Increasing jobs and creating new businesses. A rigid labor market and an outdated education system continue to constrain the growth of new businesses. The World Bank will address these issues in the upcoming Programmatic Adjustment Loan (PAL) to Croatia. Fostering the creation of a free market. Croatia needs a smaller but more efficient public sector which facilitates the functioning of a competitive market. Reforms of public administration along with fiscal decentralization are therefore priorities that will also be addressed in the upcoming PAL.

Promoting an efficient legal and judicial system. The country needs to create stable, clear, effective, and predictable laws and institutions that will promote investments and growth. These include systems to protect contracts and property rights, as well as those that ensure an impartial and efficient court system. Efficiently implementing reforms. Efficient mechanisms for designing and implementing reforms need to be developed. The restructuring of enterprises and the creation of market institutions need to go hand in hand with the development of an effective regulatory framework.



World Bank Assistance

Assistance so far. Since Croatia joined the World Bank in 1993, Bank assistance has financed mine clearance and the reconstruction of roads, bridges, and railway tracks that were damaged or destroyed during the war. It has also provided financial support to reconstruct the port of Ploce.

The World Bank has assisted the government in reforming the banking sector, increasing labor market flexibility, developing transparent and efficient market institutions, and removing administrative barriers to investment. These are key steps in building the economic and regulatory environment for the private sector to thrive and should translate into more job opportunities for Croatians.

As energy and infrastructure are key building blocks of development in Croatia, the World Bank has supported Croatia's efforts to ensure an efficient energy supply. It has helped upgrade and maintain roads, modernize the national railway system, improve the port of Rijeka, and upgrade border crossings. These activities are helping the country develop tourism and increase trade.

World Bank projects are also assisting the country to protect and manage the environment by controlling pollution in the Adriatic Sea, a major center for tourism.

Going forward. The World Bank's goals in the country now include the following:

Help improve people's welfare with effective health and social services, and better targeted social welfare programs. Enhance the country's economic competitiveness as it prepares for EU accession. Help build transparent institutions that are fair and efficient. Improve the business environment for the private sector to prosper and generate employment. Protect the environment, especially in the coastal zone of Croatia which is significant for tourism. Improve the transport infrastructure to boost Croatia's prospects as a transit country for trade. Advance Croatia's knowledge-based economy by forging stronger links between industries, universities and research institutions.

BROKER, real estate agency team.