The Government Should Engage in Large Projects with Private Investors

The path to recovery and growth A new wave of private corporate investments will increase competitiveness in the open market and initiate necessary modernization.

A stronger impulse for recovery and long-term growth can come from households and the opening of a new cycle of investments by private enterprises. The government must reduce the tax burden on employees and gradually increase pensions for retirees.

written by Dr. Damir Novotny
Managing Partner T&MC Group
[email protected]

Statistical data on the very mild growth of national product in the third quarter of this year unfortunately cannot be interpreted as a change in trend and the beginning of the long-awaited recovery of the Croatian economy. The slowdown in economic activities and the free fall of GDP has likely been halted, economic processes are stabilizing, and a balance is being established at a lower level of economic activity and employment.
Data on the decline in industrial production in the fourth quarter actually speaks of a seasonal increase in the third quarter and warns that the economy is still very unstable. Fiscal expansion in 2009 and 2010 resulted in the expected, well-researched negative effects on domestic aggregate demand (the so-called crowding-out effect).

Weak Croatian Supply Foreign demand for Croatian products and services is very weak not only due to high prices but primarily because Croatia has little to offer. Apart from tourism services, due to long-term neglect of investments in the industrial sector, the supply of Croatian companies is very weak and uncompetitive in the globalized market. From the perspective of foreign demand, a stronger impulse for the growth of the national economy cannot be expected in the short term. Public sector investments in infrastructure projects that the government persistently announces, if realized, cannot stimulate significant growth. The continuation of infrastructure investments with public money rather than private, aside from the difficulty of feasibility due to high capital requirements and very low multiplier effects on sustainable growth and employment, is completely unacceptable. The only stronger impulse for recovery and long-term growth can come from households and the opening of a new cycle of investments by private enterprises. Maintaining and increasing the disposable income of households is economically and socially extremely important. The government must reduce the tax burden on employees and gradually increase pensions for retirees (but not for privileged categories). This is a long-term process that needs to be announced and started today due to the opening of perspectives and increasing consumer optimism. The household sector can only increase its income through new employment and returning from early retirement to the labor sector. One of the most interesting European trends is the process of employing younger retirees.

Croatia as Central Asia However, for more dynamic economic growth, investments are needed, but in the private sector – both domestic and foreign – and not in state or public! A new wave of private corporate investments will not only increase the competitiveness of the domestic economy in the open market but will also initiate necessary modernization. Government policies have been focused for more than 15 years on increasing tax pressure and strengthening the public sector. Thus, the fiscal pressure on the private sector has become unbearable. For example, the earnings of employees in public administration and public enterprises are significantly higher (and security is not even worth mentioning) than in private enterprises. In developed market economies, which Croatian society at least declaratively wishes to build, the situation is the opposite. According to the degree of dominance of the public sector, the Croatian national economy can be more compared to some Central Asian economies than to modern European economies. The long-standing stagnation in privatization reflects a political stance that it would be better to maintain the state economic structure. Government policies support populist ideas about maintaining current political dominance in large public corporations. Croatia is entering full EU membership, thus into a unique developed market where large (often public-private) corporations and extremely vital private companies compete. Croatian state enterprises or enterprises that are strongly linked to public orders cannot be sufficiently competitive in such a market. The government has so far done very little in the market transformation of public enterprises and even less in strengthening private companies that can compete with international competitors. In this sense, strong pressures on the government towards closing the market and the rise of economic nationalism can also be interpreted. Government policies must actually be directed in the opposite direction: further opening and strengthening market institutions, as well as continuing privatization. The government needs to create fiscal incentives for (domestic and foreign) private investments, but also engage in large projects with private investors. This is the path to recovery and economic growth.