Croatia stakes its claim to ‘Adriatic tiger’ status

International Trade Finance magazine, 6 April 2000

Political change in Croatia has excited some interest in the trade finance community (ITF 353/10). Tim Cullen, former senior advisor at the World Bank, now managing director of the Oxford, UK-based TCA, International Policy Management, argues that Croatia’s break with the past is good for Europe.

News stories of confrontations between Albanians and Serbs in Mitrovica, Kosovo and the standoff between the international community and Austria over the inclusion of Jörg Haider’s Freedom Party in the new coalition government made depressing reading.

But this bad news overshadowed significant positive changes in nearby Croatia that augur well for the future of this part of Europe.

An early hint of spring weather matched the mood of the people who took a collective sigh of relief after they had elected Stipe Mesic, a cheerful former war hero, committed to making a break with Croatia’s recent murky past, as their new president. Mr. Mesic’s election and that of the lower house of parliament where the ruling Croatian Democratic Union (HDZ) was soundly defeated is good news not only for a beleaguered population but also for the region’s future stability and economic prosperity.

Before the break-up of Yugoslavia, Croatia was well placed to move rapidly to a market economy and become integrated with western Europe. But the 1990’s proved to be a lost decade: Franjo Tudjman, Croatia’s first president, who came to power on a wave of pent-up nationalism, led the country into a costly war and subsequent international ostracism for its half-hearted compliance with the Dayton peace accords and its dismal record of governance.

Despite a successful post-war economic stabilisation programme, by the time of Tudjman’s death, in late 1999, the country was in recession. Industrial output is well below pre-war levels and per capita GNP is about a half that of Slovenia, which managed to achieve independence without a war.

The challenge to the new leadership is to make Croatia a powerful force for stability in the region, to provide honest and open government, and to turn the economy around. These mutually supportive actions will be the prerequisites for a closer initial relationship with, and eventual membership of the European Union, without which long-term growth will be very hard to sustain.

The early signs are promising. Mr. Mesic has told Croats in Herzegovina that they should abandon their separatist hopes and look to Sarajevo rather than Zagreb as their capital. He and Ivica Racan, prime minister, underscored this new approach by saying the government will no longer pay for a separate Croatian army in Bosnia which poses a constant threat to the area round the divided city of Mostar. An enthusiastic supporter of these policies who joined Mesic’s election night victory celebrations is Hasan Muratovic, former Bosnian premier and now his country’s ambassador to Croatia. He described the economic downside of the hostilities among the former Yugoslav republics very simply: "We lost 22m customers".

The immediate need for economic reforms to restore growth and build investor confidence will test the centre-left coalition’s unity, its ability to work with a president who comes from another party and its willingness to take tough decisions.

The previous government’s privatisation programme permitted widespread abuse, with enterprises and banks ending up in the hands of corrupt businessmen favoured by the government. Banks suffered from poor management and being told to lend to President Tudjman’s friends. Last year the independent central bank began the task of cleaning up the banking system. Some banks were declared bankrupt; others were merged or placed under temporary administration and others have been sold to foreign buyers. Nevertheless the banking system remains fragile with the government still having to pay the bill for a large shortfall in deposit insurance funds.

The health and pension systems and a bloated bureaucracy are also in need of reform, which may be politically difficult. However, after the privations of war and the excesses of the previous administration, the people may well be prepared to put up with a tough programme from an honest government. This year’s proposed budget is slightly lower than the previous one, and the government says that it will adopt zero-based budgeting so that expenditure plans cannot simply be rolled over, but must be justified each year.

A major challenge will be to attract foreign direct investment to a country, many of whose industries are unsuited to the 21st century. Tourists will always be drawn to the stunningly beautiful coast, but ways must be found to upgrade the service ethic and management of resorts. Croatia also needs to capitalise on its strategic position as the gateway to south-eastern Europe and its well-educated workforce to attract the right sort of investment.

Investors will be looking for an improved legal and regulatory framework. Urgent action is required to clear the backlog of 1m court cases awaiting judgment. The European Union will also be looking at the legal protections afforded to Croatia’s citizens. It was encouraging to hear from the new interior minister that Croatian journalists will no longer have their phones tapped.

A window of opportunity has opened for Croatia to become a new ‘Adriatic tiger’. Early signs are that the international community is attracted by the ‘demonstration effect’ that a prosperous and stable Croatia can have on neighbouring Serbia and will be willing to support the efforts of the government and the people during the difficult transition period.

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Croatia stakes its claim to ‘Adriatic tiger’ statusInternational Trade Finance magazine, 6 April 2000