DEVELOPMENT CHALLENGES
Croatia unilaterally declared its independence from the former Yugoslavia in 1991, which culminated in the four-year Croatian War of Independence. Economic growth has been consistently high since 1995, with GDP growing annually by 5.3% until 1998 and by 4.3% between 2000 and 2008. The most developed country among the countries of Eastern Europe and Central Asia (excluding the new EU member-states), Croatia had a GNI per capita of US$13,780 in 2010 and belongs to the “high” income country grouping. The Human Development Index (HDI) is “very high”, with a value of 0.796, placing Croatia in 46th place of 187 countries. Croatia has also been a member of the WTO since 2000. However, the global financial crisis has taken a severe toll on Croatia, with the economy contracting by 7.2% in 2009-2010; the recovery is expected to be very modest based on a slight upturn in exports and consumption spending. The country also faces some development challenges.
Poverty and inequality
Despite increasing per capita income, about 17.5% of the Croatian population was at risk of poverty in 2008. Moreover, since the global financial crisis, the profile of poverty has changed from long-term unemployed and low-skilled workers to economically-active, better-educated, young people living in richer urban areas.
High unemployment
The Croatian labour market faces a considerably lower rate of employment than the average in EU countries. Despite a decrease of unemployment from 16.1% in 2000 to 8.6% in 2008 due to high economic growth, the economic crisis reversed these trends and unemployment rose to 9.1% in 2009. Moreover, significant regional differences in employment are present, which result from slow development in some outlying regions, especially in areas that have suffered significant war damage. The majority of unemployed persons (57.5%) are long-term unemployed, and women have a higher unemployment rate than men (10.4% compared to 7.1% in 2008).
Skills gap
Since 2000, major improvements have been made in access to education in Croatia, with the achievement of nearly universal primary school enrolment. Enrolment rates for pre-school, secondary and tertiary education have also increased steadily, reaching 60%, 88% and 52% respectively. Adult literacy is at 99%. Nevertheless, a major challenge faced by the country is in the quality and relevance of the education system. Educational programmes and teaching methods need modernization and harmonization with the requirements of the labour market, in order to reduce the skills gap of recent graduates. Management capability has been identified as the most serious skill shortage in Croatia.
KEY TRADE ISSUES
Limited access to finance
Access to finance continues to be an obstacle to the growth of Croatian businesses, in particular SMEs. Croatia’s performance in terms of creating an enabling investment climate has been mixed, and investor protection remains low. While the financial sector remained stable during the financial crisis, net foreign direct investment (FDI) inflows decreased to 1% in 2010, from an average of nearly 6% in 2001-2009. A more investment-friendly climate is required to support dynamic growth of the private sector and to ensure a sustainable recovery form the crisis.
Underdeveloped transport infrastructure
Croatia has the geopolitical advantage of lying along three Pan-European transport corridors between the European Union and Southeastern Europe. However, despite heavy investment in the development of the country’s transport network in the last decade, focusing mainly on roads and ports, the railway sector continues to face major challenges, including maintenance backlogs, inefficient operations, and insufficient integration and coordination. As a result, the sector still has large potential and room for further growth.
Cumbersome business environment and customs procedures
Improvement is also required in Croatia’s business environment, including more efficient government institutions and a more predictable legal framework. The slow and bureaucratic value-added tax (VAT) reimbursement system also reduces companies’ cash flow and growth. According to the World Bank, Croatia ranks 80th of 183 economies in terms of “ease of doing business”. The country drops to 100th position when it comes to “trading across borders”. Customs procedures are complex, costly and time-consuming. For example, the cost of exporting a container from Croatia is US$1,300, and it takes 20 days to export, compared to the OECD average of 11 days.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the Overview of Achievements of the Republic of Croatia in the Fulfilment of Millennium Development Goals During the Period from 2006 to 2010; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2009 OECD report on “Sector Specific Sources of Competitiveness in the Western Balkans: Recommendations for a Regional Investment Strategy”; and the 2011 World Bank-Croatia Partnership Country Program Snapshot.