State companies must be drivers of development, not breeding grounds for corruption

The formal adaptation of the legal and regulatory framework to the EU acquis will not, by itself, stimulate direct foreign and domestic investments.

Market-oriented reforms must continue to align the investment attractiveness of the Croatian market with that of other Central European countries.

writes Damir Novotny
managing partner of T&MC Group
[email protected]

The Croatian public sector is burdened by numerous structural problems that have become one of the most significant obstacles to economic recovery and growth. Significant imbalances in the pension protection system and chronic inefficiency of the public administration, an outdated fiscal sector, almost non-existent industrial and fiscal policies, as well as corruption and political clientelism, are just the tip of the iceberg. State-owned enterprises are not only not important drivers of economic growth and employment, as is customary in developed EU countries, but have turned into a playground for political manipulation and loss creation. With a few exceptions, public investments in transport infrastructure have not been financed by private or public-private investments, resulting in a strong increase in public and external debt.

Excessive public investments have failed to produce the usual long-term multiplier effect on economic growth. On the contrary, excessive public sector investments have become a serious obstacle to economic growth in the coming decades. During the wave of fiscal expansion in the past decade, companies that depend solely on state orders (and subsidies) were established and are not competitive in the international market. Government policy in the agricultural sector has led to the fragmentation of holdings and an increase in transfers from the central budget to small households that are not particularly motivated to improve agricultural production.

In the past decade, the state has intensively invested and strengthened its social role. Unfortunately, a stronger wave of private investments has been lacking, and the number of jobs in the business sector has continuously declined. Today, the Croatian economy faces an oversized fiscal sector, a low level of employment, and a poor state in the corporate sector, which generally lacks both vision and capital, and does not possess sufficient competencies for the necessary internationalization of business.
In a similar situation was Slovakia before entering the EU. The new Slovak government quickly initiated direct foreign investments in the industrial sector, which opened more than one hundred thousand new jobs. The regulatory frameworks and the functioning system of the national economy were adapted to the best European practices, and the government strongly encouraged investments from international industrial corporations through fiscal incentives.

Corruption has cut the Hitrorez The Croatian system of functioning and regulatory framework is anything but encouraging for international investors. In large part, this is a legacy from the pre-transition period, but it seems that the goal of the new legal solutions was to completely close the domestic economy and turn it into a self-sufficient economy. The loudly announced attempts to implement the legal guillotine (Hitrorez!) and simplify the legislative framework have sadly drowned in daily political Rašomon and corruption scandals. Most of the old and completely inappropriate solutions for a market economy in the functioning system have been retained. A large number of laws regulating the functioning frameworks of the national economy have been adapted to the EU acquis. However, the formal adaptation of the legal and regulatory framework will not, by itself, stimulate direct foreign and domestic investments.

The Croatian economic system is complicated, outdated, burdened by social egalitarianism, and is inherently an unfavorable environment for the development of the business sector. Government policy over the past fifteen years has created very complex economic and social structures that are not friendly towards investors. The generally anti-investment sentiment is largely a consequence of negative transitional experiences. For years, government policy has encouraged job cuts rather than openings, and has accepted the practice of speculative (sometimes gambling) entrepreneurial behavior. Today, its policy must encourage entrepreneurial activity that will create jobs and provide a new perspective for many economically inactive citizens. Despite the accumulated transitional frustration, the current or any future government faces a historical task: to thoroughly reform the public sector and continue implementing market-oriented reforms that will align the investment attractiveness of the Croatian market with that of other Central European countries.