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"
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.