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Croatian Economic Development and the EU

The past 15 years, from the adoption of the Antiinflation or Stabilisation Programme in October 1993, have been characterised by discussions on Croatian economic policy by economists and the wider general public. In this not particularly lively and sometimes also not well articulated and argued discussions one fairly false dilemma imposed itself – is Croatia in favour of a strong or weak HRK? Currency strength or weakness is not determined by the formal exchange rate but by the economic strength behind a specific currency. Thus according to the exchange rate, the Japanese yen is considerably weaker than the Croatian kuna, but as a currency it is immeasurably stronger. The other issue concerns the method of forming the country currency exchange rate. It might be appreciating, that is, above the real HRK value, that is, above the ratio between Croatian productivity and its main foreign trade partners, depreciating, below its real value, or in balance. To put it simply, an appreciating exchange rate thus encourages imports, the depreciating rate exports and a balanced rate strives to achieve a balance of the value of goods imported and exported. None of these exchange rate polices is either good or bad in itself. It all depends on what and how it is to be achieved. Thus a stable appreciating exchange rate of a currency, as in the Croatian case, can also encourage the development of the local economy in addition to maintaining price stability. However, it depends on the structure of imports, with prevailing investment equipment and production goods and not, as in the Croatian case, finished products, that is, consumer goods. Similarly, a depreciating exchange rate, which encourages exports and reduces imports, does not have to be positive as it can lead to excessive exports of raw materials and products of a lower processing level (semi-products) at considerably lower prices than real prices, that is, at a high level of national wealth exploitation. It should be particularly taken into account that the current account balance should, in the long-term, be in balance. It is most important that an evaluation of the effects of particular measures in economic policy, in this case, exchange rate policy, includes the extent of their contribution to an increase in national wealth, that is, their contribution to an increase in production, employment and social welfare in general. The measures and instruments of economic policy should never replace its basic objectives and become a purpose of their own as has happened in Croatia. In the context of exchange rate discussions, which were renewed in early 2008, it can only be argued that they started efficiently, but should have been started eight or more years earlier, when the problems were much easier to solve. The CNB positions are the most interesting in current discussions. The CNB warnings about foreign debt, inflation and bank moral hazards should be taken seriously, not only due to their indisputable expertise, but also due to the fact that they have available statistics unlike others. A recent statement from the CNB Governor was very disturbing. He said that Croatia could sustain a “ one-shot” external assault and maintain its relative economic stability and that this year the repayment of the external debt principal was expected to amount to € 7 billion, interest to € 1.4 billion and the current account balance deficit would amount to € 3.2 billion. It implies that Croatia, given its debt principal reprogramming, naturally, would need to incur a further debt of about € 5 billion in addition to all accompanying costs. It is worse that this is an optimistic evaluation as, given the changes in the first three months of this year, the current account balance deficit could be significantly worse than last year’ s € 3.2 billion. Naturally, these amounts of imperative additional debts can also be reduced by the further sale of the remaining national wealth. It has recently been frequently mentioned that over the past eight years the Croatian economy has been progressing. Statistics indicate a twofold GDP increase in that period. Without rough manipulation with the baseline year it can be seen that in reality GDP increased from nearly € 19 billion in 1999 to over € 37 billion in 2007. Naturally, this is the nominal (in current prices) and not the real (in constant prices) growth. However, the price paid for all these triumphs should also be taken into account. External debt increased from US$10.1 billion at the end of 1999 to US$48.4 billion at the end of 2007. At the same time there was over € 14 billion of foreign direct investment and a large part of the national wealth was sold. If the results are considered in this way, then they are far from fantastic and everything indicates the unsustainability of the existing model of macro-economic policy and the need for its change. This is indisputable. However, it is disputable which changes to implement and how, which raises two basic issues. The first issue is that economic policy rarely provides a specific solution to problems perceived, which is more a result of a struggle and a settlement between different social groups, which not only have different interests, but also different perceptions of reality. Therefore, it is normal that all groups that consider their interests jeopardised by change fiercely fight against change. The 2008 discussions should also be considered in this context. There is nothing bad or illegal in this respect and nobody is good, evil or bad. It is normal and perfectly legitimate that each social group defends its interests in a democratic society with a market economy. The only problem is the following: who defends or protects the interests of the Croatian State, its population and companies? Until now nobody has done it in a satisfactory way. This is definitely a primary task of institutions within the legal State, which is an urgent call for their more effective operability. Many issues can be ascribed to “ children’ s diseases” as this is how Croatia is learning to have its own State, but Croatia is no longer a minor and it is high time to become serious. The second problem is utter simplification, and the issues are anything but simple. This simplification results in three large misconceptions that have cost Croatia a lot of money, and as it seems, Croatia will also continue to pay this money in the future. The first misconception is that only with a stable exchange rate, or better to say an appreciating HRK exchange rate, can Croatia secure price and overall economic stability. The price of this misconception, except in external and total debt, can be best illustrated (even to those who are not economists) by agriculture. If it is profitable for Croatia to buy agricultural products of a small unit value like onions and potatoes and transport them across thousands of kilometres, whilst at the same time it has better natural preconditions, large uncultivated areas of arable land, a large number of unemployed and tourism which could take all surplus goods, then something is terribly wrong with the Croatian economy. Naturally, this is not merely a problem of macro-economic policy or the modest size of agricultural holdings, but also of State organisation and in general, the low level of social efficiency and productivity. The misconception that all problems could be resolved merely by a change of the exchange rate is similar. It does not imply a lack of an active exchange rate policy, but it implies its coordination with other parts of macro-economic policy, primarily monetary and fiscal policies. Changes should move towards a change in the structure of public revenue and expenditure and a reduction of their share of GDP and in the direction of a change in the structure of bank credit allocations in favour of the economy and interest rate reductions. Naturally, this cannot be easily implemented, particularly given the limited space to manoeuvre in which external and total debts surface as strong limiting factors. It should be emphasised that none of the measures of economic policy can resolve the accumulated Croatian economic problems overnight. In any event, these problems did not occur overnight. However, preconditions can be developed for their gradual resolution. In other words, rather than the “ shock” therapy that has been applied to the Croatian economy for over 15 years regardless of its results, Croatia needs a policy of gradual adaptation. The Slovenian example illustrates that such a policy is far more effective. The third misconception, which is being intentionally or unintentionally “ heated” , is that all Croatian problems will be resolved after accession to the EU or at least then they will cease to be solely Croatian problems. After accession to the EU, Croatian economic problems will merely become more evident. The EU helps Croatia and it will definitely continue to help in the future, but the problems need to be resolved by Croatia itself. If somebody else resolves Croatian problems, it is highly unlikely that it will be in the interest of Croatia and the general population. And at the end, a trace of optimism: Croatia is a small God-given country and none of its problems, particularly concerning development, should be a great problem. Croatia “ only” needs a good macro-economic framework, organised State with operational system institutions and vision, that is, a development strategy. Croatia merely needs a single large world company, a Croatian “ Nokia” symbolically speaking. This company would resolve almost all current Croatian economic issues (foreign trade deficit, external debt, unemployment) and the problem of further development. However, the road to this company is not simple, cheap nor fast and the final result is more than uncertain. It is completely certain that, in spite of the conviction of Croatian Liberals, this will not happen spontaneously or by itself as no Croatian company is able to take such a step forward by itself. Thus nothing will happen without the Government, that is, its investment in education, science and its financial encouragement in these projects. However, due to limited resources for education and scientific research the need is imposed to concentrate and allocate these resources first in activities of vital interest to Croatia. Unfortunately, at this moment it is unknown, except in principle, what these vital Croatian interests might be, as Croatia does not have a development strategy. A development strategy should begin with a realistic consideration of Croatian capacities and opportunities in certain areas and worldwide events in the following 10-15 years in order to define the Croatian area of development. The mitigating factor is that Croatia is a small country which does not need much. Naturally, a Croatian strategy cannot and should not be a Croatian business only. It is extremely important to know what is happening and moreover what will be happening in our environment, particularly in the EU, which is our largest foreign trading partner, the source of the majority of tourists and transport and our largest creditor at the same time. Therefore, the implementation of a Croatian development strategy and economic policy needs to contain those crucial elements of EU development strategy and policy and potential future EU changes. It is important to emphasise that the Government needs to shoulder its share of responsibilities for economic development. Although Government-led development has suffered from failure, the same holds true for any development without the Government.

Croatian Economic Development; EU; Potential and Perspectives

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