The growth of industrial production and consumption of Croatian households, along with a good tourist season and increased demand from the European market, has resulted in an acceleration of economic activities this year; GDP growth in 2016 could reach 2.6 percent. Forecasts indicate that the Croatian economy will grow in the coming years at rates of 2.3 to 2.5 percent. Such economic dynamics might be sufficient if Croatian GDP were not at only 50 percent of the EU average and if Croatian public debt did not exceed 85 percent of GDP. Romania’s economy, for example, could simultaneously grow at rates of around four percent. The economies of Slovakia, Poland, and Hungary will continue to grow at rates of 3 to 3.5 percent.
The Collapse of Agricultural Incentives
In this context, the dynamics of the Croatian economy seem quite modest, and the gap in development between us and the countries of Western, and now certainly Central Europe, will widen. Croatia’s economy could, in principle, be more dynamic due to its numerous comparative advantages (location primarily). However, economic growth and the increase of national wealth in Croatia are below their natural potential solely due to reactive economic policies and the excessive share of the public sector in economic processes. Even when the Government’s sectoral policy appears active, that is, when it clearly intends to encourage economic actors to accelerate their activities, it often hinders growth acceleration by creating unproductive economic structures. For example, for more than a decade, Croatian governments have shaped and implemented fiscal incentives for agriculture that not only have not achieved effects on productivity growth in this sector but have created deep imbalances that are particularly visible today in crop and cattle farming. Numerous demagogic and populist calls are invoking a new wave of state interventionism that would finally (politically) determine ‘whether Croatia needs milk production’, limit the import of ‘bad milk’, and define (politically) a ‘minimum price’ based on the cost structure of Croatian farmers and their need for additional profits (due to high indebtedness). Some of the main arguments supporting demands for new state intervention, which appear in current discussions about the state of domestic dairy production, relate to ‘the low interest rates paid by European milk producers’ and the high VAT rate that domestic farmers pay on their input costs. Public discussions about the announced changes in the tax system (which are heading in a good direction but cannot be declared structural reforms and the most important government project) are often intoned with demands from farmers for tax reductions.
