DRAFT version – WORK IN PROGRESS
CROATIA - COUNTRY PUBLIC MANAGEMENT PROFILE
Marija Kaštelan Mrak, associate professor, Faculty of Economics Rijeka, Croatia
Abstract:
The paper presents the circumstances and features related to the process of Public Administration reform in Croatia. The paper should serve as a basis for discussing the reform process in Croatia and for defining direction for the continuation of the research. The paper is structured according to the methodology proposed by Pollit –Bouckaert. Sections of the paper have thus been "numbered" accordingly.
1. Introduction
Croatia is a SEE country with 4.4 million inhabitants. Croatian territory covers 56,542 sq. km and it has a peculiar croissant shape, which leaves a very long borderline. Croatia is also a Mediterranean country with a territorial sea area of 31,057 sq. km, hundreds of inhabited and non-inhabited islands where tourism is the main economic activity.
Independence from Yugoslavia was proclaimed in 1991. Croatia was internationally recognized in January 1992. In a political sense Croatia is a parliamentary democracy with three branches of power. In October 2005 Croatia was given EU candidate status and negotiations for EU membership (35 chapters of the Acquis) started in the spring of 2006.
2. General Conditions
Independence was gained in 1991.
A.Socio-Economic Forces General
Major economic and social events during the past few years relate to the EU accession process. The advantages of entering the EU concern the impacts of EU accession on economic trends: capital inflows and investment,[1] trade flows and trade balance, employment and general economic and social development.
Even though Croatia has received EU candidate status in the Fall of 2005, together with Turkey, it was later than Bulgaria and Romania,[2] that have received the same status in Spring of 2005.
For Croatia, even though expected, the entrance of 10 CEE countries into the EU on May 1, 2004, signaled that Croatia would have to wait to enter the EU at least until 2009 when it will be time to constitute the new European Parliament. It would also mean, and so it is confirmed by the initiative of the EU in proposing a free trade zone for the Western Balkans, that the process of Croatian Integration to the EU would be much tied down to the progress achieved by other countries in the region often denominated the Western Balkans (WB). Croatia, or its Prime Minister Ivo Sanader (supported by the President of the Republic and by the Croatian Parliament would rather have other SEE countries, plus Moldavia and possibly Ukraine, join the already existing CEFTA, from which each country will exit independently once it is accepted into EU membership.
Early entrants, from 2004, are believed to have had less rigid entrance criteria and access to higher financial aid. Croatia was not one of the New Europe 10, allegedly for political reasons. As for economic reasons and level of economic development, Croatia is more advanced than other WB countries. In terns of GDP p/c, Croatian GDP per capita in 2004 was at 47 % of average EU GDP/c, or a 7,732 USD per capita according to the Croatian Bureau of Statistics (CBS) (46.5 of average EU25 GDP according to eurostat). GDPs for other countries as well as some other comparative macroeconomic indicators are shown in table 1.
Table 1: Comparative macroeconomic indicators for SEE and Croatia
Country
/ GDP/c in PPS in 2000 (EU25=100) /GDP/c in PPS in 2005 (EU25=100)
/ FDI/GDP2001
EU25=2.4 / FDI/GDP
2004
EU25=0.9 / General** government fixed invest. %GDP (2004)
Bulgaria
/ 26.6 / 33.3 / 2.6 / 5.4 / -Croatia
/ 41.0 / 47.5* / - / 3.6* / -Romania / 25.0 / 34.2 / 1.4 / - / -
Turkey / 29.9 / 29.2 / 1.3 / 0.6 / -
Hungary / 53.0 / 61.9 / 4.1 / - / 3.6
Slovenia / 73.0 / 82.6 / 1.4 / 1.7 / 3.4
Poland / 46.9 / 49.8 / 1.5 / 2.6 / 3.5
Czech Rep. / 63.8 / 73.3 / 4.8 / 2.3 / 5.0
Slovakia / 47.2 / 56.1 / 3.7 / 1.0 / 2.5
Source: eurostat – years chosen according to latest available data
*Source: CBS, GDP/c at eurostat 46.5%
**General government sector investment consolidated between sub-sectors at national level – Euro-zone average 2.5% ( higher than average among new entrants, southern countries, Scandinavia. No data available for Croatia, but considering road works and size of government in general, supposed to be high...
Pre-accession periods tend to bring in a strong string of FDI that, for Hungary, the Czech Republic, Poland and other CEE countries helped restructure the economy and raise exports. As noted by Sohinger (2004, p- 1), "economic conditionality of FDI and EU access–driven reforms...are helping the goals of transition and the convergence process." thus transforming the business and government sector". The UN considers all accession candidates economically stable, and stress solid FDI flows and rising investor interest, continued restructuring and improved financial intermediation (WESP 2006, p. 103)
B.Global Economic Forces
Concerning global economic trends, Croatia has had dynamic growth, but at little lower rates than other CEE economies. For Croatia, growth was slowed down though in the nineties by the independence war, but also by the fact that Croatia was not accepted to join the EU in the first round.
In general it can be said that the privatization of the Croatian business sector is completed, with the exemption of some tourist firms. What remains to be privatized are the utilities sector (electricity, water supply), but also the railroads and the shipbuilding industry.
Generally, the problems of the Croatian economy concerning global forces do not differ much from those in the rest of Europe. Although labor is relatively inexpensive, Croatia companies are struggling to raise competitiveness on world markets. Being a small economy, which until the nineties developed to serve mainly the Yugoslav market (some 20 million people at the time), the larger firms that survived transition are generally smaller in size, economically more diversified to achieve comparative scale economies. Also, the feeble financial capacity of the economy[3] and of individual firms during the nineties did not allow for more significant investment into new technology, products or process. Rare were the Croatian firms, such as the pharmaceutical company Pliva that were able to stay competitive and expand across national borders. In general terms, the manufacturing sector has not yet fully recovered (leaving a high level of unemployment of the unskilled or lower-skilled workers, the tourism industry is once again on the rise, and the agriculture is in need of restructuring for gaining more efficiency.
For the business sector, future developmental prospects will probably depend on the successful integration of individual enterprises and clusters into European economic networks, either as incorporated business or as autonomous firms supplying goods and services on international markets. According to the classification of the World Bank Group (Doing business in Croatia, Croatia is on average or above region average on most indicators.
At the present, the financial sector is sound, even though almost totally held by foreign banking groups. However, the financial industry is rather concentrated and dominated by banks whose business policies influence the level of foreign debt, the exchange rate, but also reforms in the pension system, the insurance sector, financial markets, prices of real estate, etc.
The current account balance for the Croatian economy is negative, with total outstanding external debt growing every year (30.9 mil. USD in 2004 – source: CNB). In 2004, exports were at 8 million dollars, while imports were more than double at 16.6 million dollars. Fortunately, the service industry has a positive balance with the tourist industry providing 6.7 mil USD revenues in 2004.
Croatia must also be very careful to preserve natural resources (and tourist industry), but especially its land resources (soil), water resources and bio-diversity and cultural heritage. Those are the "natural" resources prone to generate growth and employment in the future. There is a danger that, considering the public debt and pressures from abroad, Croatia might be forced into infra-structural projects[4] such as pipelines than pose serious ecological and social risks as well. Once the land and waters (sea and drinkable water resources) are contaminated, this would leave a large share of the population will be left with fewer a possibilities to earn a living in Croatia.
C.Socio-Demographic Issues
The population of Croatia is rather small, 4.4 million people according to the last census of 2001. Life expectancy at birth is 74,73 years (78,23 for women and 71,17 for men) and is higher than in average upper middle-income countries (NSCMH, 2006, p. 12).[5] By age structure, 16.7% of the population are under the age of 15 which is bellow EU average, working age population, or those between 15-65 accounts for 68.1% of the total population while 15.2 % of the population is older than 65 years of age. (WDI 2003, p.38)
According to a labor force survey carried out in the second half of 2003 (CBS, statistical information 2004, p. 30), the active population includes 1,8 million people, that are engaged, in terms of sector of employment, 54% services, 29% industry, 17% agriculture. The World Bank estimate is that the informal economy accounts for 33.4% of GNP.[6]
The same CBS survey showed that 65% held paid jobs, 17,5 % were self employed, 3,1% declared themselves as unpaid family workers and 14,4% declared themselves unemployed. The official unemployment rate, or the number of registered unemployed by the Croatian Employment Service is higher and reaching some 18-19% in 2005. The highest rate of official unemployment was reached before summer of 2002 and has been falling since.
Wages in paid employment vary according to activity sector, education, location, etc. Average earnings are lowest in agriculture and highest in the service sector.
Croatia is among a minority of countries in the world where depopulation has been going on for the past two decades (World development Indicators, Population dynamics, p. 38-40). The crude death rate (11) is above the crude birth rate (9), similar to a number of other European countries. Concerning the fact thatCroatia has an aging population, demand on social funds is raising and comprises a large share of central government spending. Thus, there is a possibility that a growing budget deficit will be controlled by the reduction of social rights to pensions and health treatment. Demands for reforms started already at the end of the nineties,[7] the former coalition government (2000-2004) did carry on a partial privatization of the public pension system, but was not strong enough to carry out the same process in the health care system.
D.National Socio-Economic Policies
National socio-economic policies are most visible through the processes of reforming the system of social benefits trough a process of privatization which will, on average, reduce the level of social benefits (protection) for those not capable to put aside private savings for retirement or pay private health insurance. At the moment the reform of the public health system is one of the top social, economic and political problems. A document presenting a National Strategy for reforming the health care sector (2006-2011) has been made public in March of 2006.[8]
The system of social pensions is in the process of reform since 1999 when the first law providing for the privatization of the pension system was declared. The problems arising at the moment are that the average pension has been falling behind salary levels and for pensioners that retired after 2000 monthly allowances are on average 39% of average salaries.
Part of the social burden of the pension and health care system might be resolved by increasing the number of contributors to the systems, i.e. by increasing employment. Average unemployment is at present around 14 %. It is higher among the young and lower skilled. For this year, the Ministry of the Economy has initiated yet another scheme for helping the unemployed.
E.The Political System
Croatia is by Constitution a parliamentary democracy. The Croatian Parliament is the oldest state institution that has represented Croatian statehood even in times when Croatian was part of multinational state such as the Austro-Hungarian Empire. The first democratic multiparty elections held on May 30, 1990, the Parliament consisted of two domes: the Chamber of Deputies with legislative power, and the Chamber of Counties that carries an advisory role, but had the right to veto. The Chamber of Counties was eliminated after 2001 with the new constitutional amendments.
Two parties dominate the political scene in Croatia, one, the Croatian Democratic Union (HDZ), now heading a coalition in Parliament and the other, the former communist party now reformed and named Socio-Democratic Party (SDP), which has reformed after the fall of communist regime in 1990. None of the two leading parties has enough power to form a government on its own which, neither at notional level, and often, not even at the local level.[9]
The Croatian Parliament[10] (elected on November 23 2003) has 152 members, 63 or 41 % of the seats are held by members of the Croatian Democratic Union (HDZ), 30 or 22,5 % by the Social Democratic Party (SDP), 11 by the Croatian People's Party (HNS), 7 by the Croatian Party of Rights. Nine other parties have from 1-4 deputies and 10 deputies are independent deputies (officially 14, but 4 are displayed as SDP non-party MPs). The Croatian Parliament is a one-dome parliament that sessions at least twice a year and enacts laws after one to three readings. Laws are passed if half of Parliament members present vote for. Laws that concern minority rights are passed if two thirds of all MPs vote in favor. Organic laws (on human rights, the electoral system, government bodies and PA structure) pass if half of all MPs vote in favor.
The executive government is the dominant reform actor. Even though the present executive branch was constituted as a coalition government, the role of the Prime Minister Ivo Sanader seems to have become even stronger after "loosing" two powerful ministers (Foreign Affairs and Health Care, both politically active before 2000) at the beginning of his mandate one for health reasons and the other for alleged conflict of interest. Thee reform process has in fact been intensive and the government backed up on only a few occasions: it slowed down the privatization of the yet not privatized tourist firms after an unclear situation with one privatization, the environmental analysis on the oil pipe line was rejected (by Parliament).
Most reforms and a strong commitment to fast integration into the EU appear to be under control. Intended reforms are comprehensive and target human resources management, financial management and performance measurement and organizational (structural) changes. However, for the moment, the main concern is to raise the quality in terms of professional standards of public servants.
F.New Management Ideas
The main channel for the transfer of new management ideas was through the involvement of international organizations that exerted a pressure to commence political, economic and social reforms. The most active in terms of financial aid and counseling have been the IMF, the World Bank, IBRD and the EU. They were those initiating unpopular economic and social reforms that affected large shares of the population, from promoting thee early stages of the enterprise privatization process, to consulting (offering financial help) to for the more recent reform processes such as the reform of the public pension system and the public health system.
Another source of new management ideas and new behavioral standards came from the restructuring undertaken by business sector. With the market economy establishing itself in the business sector, differences in labor security between the private and public sectors became more evident. Eventually, the once safe working positions (for life) that did not demand extreme efforts and did not involve career risks became less stable. However, due to low labor mobility,[11] and a relatively modest number of experienced professionals, ideas and managerial techniques transfer slowly.
G.Pressure from Citizens (personal opinion)
Pressure from citizens depends highly on the transparency of issues and is much influenced by the press. Public opinion is formed and stronger on some issues – ecology, social benefits, political ideas (war heroes and international relations), apprehension of foreign owners, etc.
A non-government organization PULS has established itself an often used opinion tracker, whose surveys are often given in pre-election period or on matters that raise high public interest.
H.Party Political Ideas (personal opinion)
Party political ideas can be generally described as left and right, even though two of the strongest parties like to add "center" when describing their political orientation. Still the strongest impact on party political ideas is exerted by their position at the moment: whether in power or not. So party ideas cam be characterized as dominantly unstable...and opportunistic, very much dependant on the person in power at the moment.
However, regarding public sector reform all parties advocate reform that will raise the quality of public service, increase transparency, reduce costs and so help balance the budget deficit.
I.Chance Events – major crises
For reasons of growing foreign debt and because of the relatively large budget deficit, international observes consider Croatia to be exposed to foreign market (especially financial market) risks. There is also concern that there is excessive reliance on domestic demand as a source of growth (WESP 2006, p. 105), which is furthermore financed by borrowing.