Croatia 2025 Can Be Prosperous with Ambitious Measurable Reforms

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Centre for Public Policy and Economic Analysis (CEA) has published its Croatia 2025 Vision which contains concrete market reform ideas for minimum 30% increase of competitiveness and economic freedom. All ideas are based on relevant world methodologies with concrete policy direction adjusted to practical challenges. 

Where is Croatia now?

According to the World Economic Forum, Croatia hold the 74th position in terms competitiveness in the world. World Bank’s Doing Business 2018 report puts Croatia at the 51st place, while Heritage Foundation places Croatia on the 92nd place with 62% in its index of economic freedom.

According to Eurostat, in 2017, Romania reached the same economic standard (GDP per capita in purchasing power parity) as Croatia. Among EU Member States only Bulgaria ranks lower. Many Member States which were lagging behind Croatia at the end of 20th century are now doing much better (Slovakia, the Czech Republic, Poland, and all Baltic states).

Vision and Mission

Croatia should be more open for entrepreneurial initiative, talents, and knowledge. It should become the frontrunner in designing partnership for objective, rational, measurable, qualitative, and innovative policy analysis and solutions which can lead Croatia 2025 towards European competitiveness average. It should also focus on promoting constitutional article 49, which guarantees entrepreneurial and market freedoms.

Criticism Without Indicators

On numerous occasions, critics used the term “reforms” without any concrete numbers and indicators, purpose behind reforms, current policy reality, or objective assessment of policy advantages and drawback. It also happens that critical thoughts go without a constructive recommendation for a concrete solution. Therefore, it is necessary to see a difference between populist proposals and a rational policy approach.

Which 2025 Objectives Could Be Set?

Public spending in GDP should be downsized from 47% to 35%. It is critical to pass 40% and then go down towards 35% (and even less). This path would generally mean following Baltic statistics regarding public spending.

Public spending burden mainly consists of wage bill and welfare security. Wage bill spending in GDP should be downsized from almost 12% to 8%. While the EU average is around 10%, much more prosperous Germany and Austria are set at 8%. This means there is a need in Croatia to rationalize public sector.

Competitive principles of new public management could be introduced, including standards of quality management. High labor tax burden hampers job creation and investments. High social security contributions (overall 35%) feed only in half to health and pension costs. A costly welfare state is not sustainable. The number of hospitals in the country should be reduced while privileged and early pension schemes should also be questioned. This is the only way to cut labor taxation i.e. contributions from 35% to the maximum of 30% (ideally, 25%).

Tax burden could also be lowered and economic freedom increased by introducing personal income flat tax of 15% (instead of 24% / 36% rates) and by freeing retained profits from taxation. Public debt in GDP can continue to decrease from currently around 80% to the maximum of 70% and 60% in the long run (in order to reach the EU fiscal discipline rule). Red-tape costs are down by at least 30% and anti-competitive market barriers should be removed. These are just some of the examples of reform objectives for 2025.

Values and Reforms

A part of these proposals has already been recognized. Many have been discussed, yet, mostly in a very general manner. Therefore CEA advocates free market agenda and defines 30% of minimum reform targets.

The problem is that the reforms require much more than changes in the way institutions operate. Reforms should always be supported by values. It is not a coincidence that certain countries rank in TOP 30 when it comes to the competitiveness ranking (according to the World Economic Forum).

It is true that some democracies function well and then produce high quality institutions. It is also true that many democracies show their deficits in quality of culture and mentality, which than influences institutions and long-term growth. If work ethic is lower, less productivity will directly influence opportunities to increase competitiveness and prosperity. If a society is not open (enough) for new (digital) technologies, foreign direct investments and innovations, it is hard to imagine other sufficient engines of its growth.

Values change slowly which poses a risk for institutional reforms. However, this should not be an alibi but rather an important incentive for reforms to deliver sustainable and significant effects in the long run.

Daniel Hinst
Centre for Public Policy and Economic Analysis