Saturday, February 24, 2007

Croatia Online - Business Environment


Following on from our last, somewhat reflective, posting on the business environment, it's a little depressing to read what Balkan Investigative Reporting Network ("BIRN") has to say.
They report on the latest findings of The Heritage Foundation and The Wall Street Journal's recent Index of Economic Freedom and Croatia's reaction to its lowly ranking.
According to BIRN's report, Croatia is in denial about its desperate showing - 109th out of 147 countries worldwide and 37th out of 41 countries in the geographical region of Europe. BIRN seems to suggest that the Croatian Government's ability to "spin" the criticism away rivals New Labour's skills at their best.
The Index of Economic Freedom included the following comments on Croatia:
1. "Mostly unfree" in terms of economic freedom
2. "Repressed" in terms of property rights, rule of law, corruption and freedom from government
3. "Mostly unfree" in terms of investment freedom, labour freedom, and business freedom
What is particularly concerning is the names of some of the countries that have been ranked above Croatia. These include Azerbaijan, Ecuador and Cambodia, to name but a few.
On the plus side, financial freedom was described as "moderately free" and trade freedom, fiscal freedom and monetary freedom were "mostly free"
For the full BIRN article, including Croatia's reaction, go to BIRN - Croatia Resists Reform.
Below are some extracts from the Heritage Foundation Report. You can download the full report, or extracts, by following either of the links above.
***

Copyright © 2007 by The Heritage Foundation and Dow Jones & Company, Inc.
Croatia’s economy is 55.3 percent free, according to our 2007 assessment, which makes it the world’s 109th freest economy. Its overall score is 0.9 percentage point lower than last year, partially reflecting new methodological detail. Croatia is ranked 37th out of 41 countries in the European region, and its overall score is below the regional average. Croatia scores well in trade freedom and in monetary freedom. Although the top income tax rate is high, the corporate tax rate is low, and total tax revenue is not unreasonably high as a percentage of GDP. Inflation is low, and prices are fairly stable, but Croatia’s monetary freedom score is hurt by lingering government price manipulations.

Croatia is recovering from a decade-long civil war. Freedom from government, investment freedom, property rights, and freedom from corruption are all low-scoring areas. Government expenditures are extremely high, and significant state regulation impedes the easy flow of commerce. The court system is prone to corruption, political interference, and inefficient bureaucracy, and some investors prefer to seek international arbitration. Significant unofficial restrictions on foreign investment, such as highly politicized decision-making, exist for those investors willing to brave Croatia’s regulatory maze.

BUSINESS FREEDOM — 53.8%
Starting a business takes an average of 45 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license is very difficult, and closing a business is difficult. Bureaucratic obstacles remain onerous, as burdensome administrative regulations challenge new entrepreneurs. The overall freedom to start, operate, and close a business is restricted by the national regulatory environment.
TRADE FREEDOM — 77.8%
Croatia’s weighted average tariff rate was 1.1 percent in 2005. Non-tariff barriers include customs corruption and strict testing and certification requirements for some imports. Consequently, an additional 20 percent is deducted from Croatia’s trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — 79.9%
Croatia has a high income tax rate but a low corporate tax rate. The top income tax rate is 45 percent, and the top corporate tax rate is 20 percent. The government also imposes a value-added tax (VAT). In the most recent year, overall tax revenue as a percentage of GDP was 24.2 percent.
FREEDOM FROM GOVERNMENT — 36.5%
Total government expenditures in Croatia, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 51.6 percent of GDP, and the government received 4.1 percent of its total revenues from state-owned enterprises and government ownership of property. Privatization has progressed slowly.
MONETARY FREEDOM — 79.3%
Inflation in Croatia is relatively low, averaging 2.9 percent between 2003 and 2005. Relatively low and stable prices explain most of the monetary freedom score. Many price supports and subsidies have been eliminated, but price changes on some 30 products must be submitted for approval to the Ministry of Economy. For example, the Ministry must be notified two weeks in advance of price changes for milk and bread. Consequently, an additional 10 percent is deducted from Croatia’s monetary freedom score.
INVESTMENT FREEDOM — 50%
Foreign investors have the same rights and status as domestic investors and may invest in nearly every sector of the economy, but unofficial barriers persist. Because of a complex bureaucracy and lack of transparency, personal and political loyalty can trump economic merit when it comes to establishing a new investment. Foreigners may purchase real estate only with permission from the government. Both residents and non-residents are allowed to hold foreign exchange accounts, but numerous limitations exist, and government approval is required in certain instances. Some capital transactions, such as inward portfolio investment, are subject to limitations and conditions set by the Ministry of Finance.
FINANCIAL FREEDOM — 60%
Croatia’s financial system is stable and competitive. There were 34 commercial banks and four savings banks in 2005. Two national commercial banks (Zagrebacka Banka and Privredna Banka Zagreb) are majority foreign-owned and control over 40 percent of banking assets. The government owns over 98 percent of Hrvatska Poštanska Banka (the largest domestic bank) and the Croatian Bank for Reconstruction and Development. Many banking assets are foreign-owned, and newly adopted financial regulations harmonize with European Union standards. The insurance sector is small but highly competitive. The partially stateowned Croatia Osiguranje is the largest player in the insurance sector, accounting for over 40 percent of assets. The stock exchange has been growing rapidly, and securities markets are open to foreign investors.

PROPERTY RIGHTS — 30%
The court system is cumbersome and inefficient. Very long case backlogs mean that business disputes can go unresolved for years; some investors have chosen to insist that contract arbitration take place outside of Croatia. The government of Croatia has made a commitment to reinvigorate its efforts to reform the judiciary, but much remains to be done. The judicial system is one of the areas that are most affected by corruption.

FREEDOM FROM CORRUPTION — 34%
Corruption is perceived as significant. Croatia ranks 70th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.

LABOR FREEDOM — 52%
The labor market operates under restrictive employment regulations that hinder employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly. High wage costs and rigid labor laws impede business activities. The labor code mandates retraining or replacement before firing a worker.

5 Comments:

Anonymous Anonymous said...

Please consider the source of your material. The AEI is not a very neutral source for economic or political information. The AEI publishes what the Western Elites want published...

1:09 am  
Blogger Jane Cody said...

Our reader above is not the first to question the neutrality of the source of the information for this posting. The Croatian government itself is also sceptical of the findings but cynics might say that this is because the report is critical of them. The problem we have is finding alternative sources that might give a different view. If anyone knows of a similar report produced by Croatia, or one that suggest a different view, please let us know.

9:26 am  
Anonymous Joel Anand Samy, Co-Founder, Adriatic Institute for Public Policy, Croatia said...

Just as a point of clarification, the Index of Economic Freedom is published by The Wall Street Journal and The Heritage Foundation and not the AEI as sugessted by earlier comments.

In an open letter to Croatia's prime minister, Ivo Sanader, the president of The Heritage Foundation, Dr. Edwin Feulner, relays a succinct and clear message about the Index of Economic Freedom published by The Heritage Foundation and The Wall Street Journal:

An Open Letter to the Prime Minister of Croatia

Sir,

The Heritage Foundation and Wall Street Journal are committed to an honest and transparent account in its annual Index of Economic Freedom. Our data is compiled from top national and international sources, providing a bedrock for quantitative analysis. Our methodology, reviewed and endorsed by a renowned academic advisory board, is rigorous, rational, and objective in measuring ten components of freedom such as tax rates and property rights.

Economic freedom is one of the most powerful forces shaping the modern world. It is strongly correlated with prosperity, and so presents nations with a choice. Either they embrace limited government, the rule of law, and high civil standards, or their economy does not grow.

As an emerging European democracy, Croatia has made great strides in shaking off the legacy of communism and civil war. The economy in Croatia is a mere 55 percent free, by our 2007 measure, and ripe for reform. To compete with its European neighbors, Croatia must reduce government spending sharply in order to free the private sector, reduce regulations which act as barriers to business, and fight corruption.

With a commitment to these policies, Zagreb can secure a more prosperous future.

Sincerely,

Edwin J. Feulner, Ph.D.
President, The Heritage Foundation
Washington, DC, USA

8:46 pm  
Blogger Jane Cody said...

Croatia Online is grateful to Mr Samy for his comment in the interests of a greater understanding of the issues and processes concerned. They have therefore been published without any editorial input.

However, in the interests of fairplay and balance, and in the hope that Mr Samy may read this follow up comment, could the Adriatic Institute for Public Policy make an additional comment on the following:

1. The date of the open letter to Mr Sanader.

2. Whether Mr Sanader has yet had the opportunity to comment.

3. If yes, whether Mr Sanader's response is available for publication.

4. If no, whether the Adriatic Institute for Public Policy hopes to engage further with the Croatian Government to bridge the gap over what appears to be a fundamental divide on the conclusions reached by the report.

10:33 pm  
Anonymous Joel Anand said...

Dear Ms. Jane Cody,

In reference to your questions, I would like to relay the following answers and brief commentary:

1. Two open letters were sent to Croatia's Prime Minister. Dr. Feulner's letter was dated January 29, 2007 and a joint open letter signed by Roger Helmer, MEP, UK and the Adriatic Institute for Public Policy was dated January 30, 2007.

2. Both organizations and Roger Helmer, MEP, UK are awaiting a response from PM Sanader.

3. In light of the Adriatic Institute's recent strategic events in Brussels, London and Washington, DC, the leadership members of the regional think tank are encouraged by signs of a robust endeavor by both EU and NATO officials in reminding Croatia's elected officials about the importance of establishing the rule of law, reforming the judiciary and implementing market reforms...all which are key criteria in joining the Euro-Atlantic Institutions.

During a recent meeting at The White House whereby Adriatic Institute’s leadership and key partners discussed Croatia’s bid to joining NATO, senior administration officials did affirm the renewed robust measure. This renewed robust measure must have clear benchmarks for Croatia’s elected officials and not to depend on rhetoric.

In perusing through international and local reports on Croatia, one must also review the Doing Business Report published by The World Bank and also Transparency International's annual reports which shed light on Croatia's current challenges.

Ms. Cody, I would like to draw your attention to the more than 1.3 million back logged court cases in Croatia as well as the tens of thousands of Croatian citizens expending much time and personal resources in the court systems to claim their private property. Please bear in mind, that a majority of these cases have been circulating in Croatia’s court system for over 17 years! A majority of these individuals are pensioners living out of a meager income and hoping to either sell their land or develop it and generate new income.

I have taken time to meet with senior citizens in their 70’s or 80’s hoping that they can claim their rightful property. For many, the long-awaited resolution will be too late.

As a regional think tank, Adriatic Institute's primary objectives for Croatia and the southeast European nations is to strengthen the rule of law, reform the judiciary and implement a robust anti-corruption strategy. These are essentials and will provide a solid foundation for future market reforms.

The recent arrests of senior government officials employed by Croatia’s Privatization Fund (HPF) are a step in the right direction. However, it misses the target. Croatia's media communications leaders, elected representatives and citizens are concerned that "going after the small fish" will not make a dent into Croatia's present culture of corruption. Individual citizens and taxpayers are clearly frustrated by the lack of a robust effort to arrest the major figures behind "the small fish".

We would encourage Ms. Cody to meet with Croatia’s brave entrepreneurs such as the Robert Maricak and journalists from Croatia's leading independent business daily - Business HR as well as ordinary citizens and listen to their concerns about Croatia's current challenges and its future. They live and work in Croatia and in fact, their experiences and examples are best reflected through the various reports on Croatia. There is an incredible correlation to challenges on the ground and the report findings in The Index of Economic Freedom published by The Wall Street Journal and The Heritage Foundation and The World Bank’s Doing Business Report.

As Nobel Prize Laureate Dr. Milton Friedman stated, “Economic freedom is a pre-condition to political freedom.”

Ms. Cody, I would also like to bring to your attention to a recent report from an elected representative from the United Kingdom. Mr. Roger Helmer, MEP, UK wrote a compelling piece which can be viewed by visiting:
http://www.rogerhelmer.com/hrvatska.asp

The appropriately titled "Echoes of Versailles in Zagreb" provides readers with an extraordinary picture of Croatia's conundrum.

In light of Croatia's challenges, its citizens and taxpayers do have an opportunity this election year to voice their concerns at the ballot box. With the forthcoming elections in November 2007, politicians that make a commitment to establishing the rule of law and protection of property rights in Croatia along with implementing tax reform, labor law reform and the pension reform will certainly have an opportunity to lead Croatia out its impending economic crisis. Croatia cannot afford to entirely depend upon tourism or to selling its land to Europe’s pensioners.

Croatia is at the crossroads - it can either embrace bold reforms like other dynamic eastern European nations - Estonia and Slovakia or it can further lag behind. The tough choices and important decisions will have to be made by Croatia’s electorate and its elected representatives.

Joel Anand
Co-Founder, Adriatic Institute for Public Policy and International Leaders Summit on Economic Growth

11:06 pm  

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